I haven't read the entire thread yet (willl after this post) but there are a few things you would have to consider.
1. What would Nintendo have done if they didn't make Wii? Would they have made a system that competed with the big guys, powerwise? Or would they have opted out of consoles, stuck with the DS, and become a TP, consolewise? I personally would have bought a similar console from them, but I think it would end up seling worse than Gamecube (due to still-weak online support), while Xbox would do significantly better--I believe, out of people who only have a Wii this gen, 1/3 would get a 360, 1/4 would get a PS3, a few would buy this new console, and a good percentage wouldn't buy anything (the casuals they're targeting, for instance).
2. As for the market itself, it would absolutely be in decline. No company would be in the black, we wouldn't have made any progress in getting new people to play games, and the industry would just be stagnating in general. Nintendo has given devs the chance to make games where they don't need to make a significant risk (like spending $20 million on a game) in order to make some sort of profit. If they didn't make Wii, there is no way this could happen.