The reasoning for why this gens market leader is down so much is multiple.

(for the sake of argument, lets accept the notion of the core and casual customer)

1. Gateway Inroduction. When a younger kid or anyone for that matter gets a wii as their sole console and really takes to video games, the wii serves as a gateway console leading to the purchase of a PS3 or 360.

2. Market Segment Dilution. There are 2 segments of consumers for consoles, "casual" and more hardcore gamer oriented or "core", (although ofcourse sometimes core gamers buy the wii, always exceptions etc.)Before, the 360 and PS3 split one of these segments while the wii had the other all to itself, thus the wii naturally sold more. But now those segments have been diluted due largely to kinect and somewhat Move.

This means something different for each console;

-The wii loses customers (as the wii is seen as the older casual)

-The 360 gains alot of casual customers but also loses some core customers (as the 360 is seen as both core and casual)

-The PS3 gains a litte bit of casual but also gains a lot of core customers (as the PS3 is now seen as the only choice for core customers.)

3. HD consoles matter more now than they originally did. This is simple, tech is going to show its age, or conversly, come into its own as time goes on. It may be that a console without HD or online connectivity (like the wii) is really starting to show its age unlike the other 2 consoles.

4. Games Games Games. As the title says, Games matter. Its no secret that 3rd parties have all but abandoned the wii, as it was always in first place in total console sales, the other 2 consoles combined always sold more, and that is how devs always saw it. It was a scenario from the start to either develope for the wii OR develope for the HD twins, this spelled doom for Nintendo. 3rd party support is nowhere to be seen for the wii now a days. It also doesnt help that there are really no games of any kind to speak of on the wii currently. Heres hoping that Zelda brings brighter days.

What does any of this really mean.. I dunno. The wii could just end up having the most sales at years end to make up for the slower rest of the year like it always does. But I'm starting to think that because of the reasons above that it may fall from grace and stay there from now on.

The lack of 3rd party support is also mostly due to the technical perfmormance of the Wii.

Developers most of time have to do a whole new game for the Wii. A simple port of the HD version won't work.

There is no casual/Hardcore divide.

The reason that the Wii fell from grace is that the industry shunned it from day one, and Nitendo made the wrong games for it (Wii music, Super Gamecube games.)

If it gets some real system sellers again, it will start doing well with or without third parties.

And comined PS360 sales being greater than Wii is also a reason I think.

 I thought the Wii was selling at around the same rate as PS3/360...  >_>

Were people expecting the sales to keep sky-rocketing into the heavens for all eternity? Never slowing down?

Nintendo will just squeeze the last drops out of it, like Sony did with the PS2, and move on to its successor.

Nintendo didn't try to cater to 3rd parties as well as they should have but the support is still better than it was in the GC days.

They just have to fix the mistakes they made for the successor.

The Wii has tons of System sellers, games arent the issue. The Wii itself is the problem. The Wii  needs to be refreshed, it feels old and behind. When you have as strong as competitors as the Wii has whom have both had new slim versions, new hadware and such, Nintendo needs to to something about it. Even the PS2 got a refresh. 

How much smaller can they make a Wii?

Maybe a weight increase is the solution tehe

So you think it's normal for a market leader to peak on it's 2nd year and sell quite a bit less every year after while the competition get's stronger and stronger with sales? Normally it's suppose to peak around the 4th year then have sales slowly going down while still killing the competition.

This is definitely a first, usually when we find a market leader it dominates the whole gen. The way things are looking in the end this gen could become a statistical tie between the Wii, PS3 and X360.

I think there's a few easier explanations for why Wii sales are down than the ones in the OP.

1.) Market saturation. Most people who have an interest in the Wii have one at this point.

2.) No real system-sellers in a while. Granted, some great and strong-selling games have been released in the past few months, but nothing on the same level as Wii Fit or Mario Kart Wii.

3.) The 3DS is right around the corner. This means that a lot of developmental focus and hype is getting directed away from the Wii and towards the new system.

4.) The Wii is four years old and runs on dated hardware. It makes sense for its momentum to be on the decline.

Refresh doesn't really mean slim version.