Many of my ideas have already been stated by others, but since I love hearing myself speak I'll go ahead and repeat them anyways.
To begin with, the only part of the idea which I think is particularly attractive is that it potentially lets Nintendo focus its limited resources into a single console, rather than splitting them up between two or more platforms. This is especially useful since unlike their competitors Nintendo apparently has the burden of being the primary, if not exclusive, supporter of their own systems.
However, I find there to be far more drawbacks to this plan than benefits. As others have pointed out, by unifying the consoles Nintendo would effectively be surrendering one of the two main markets. Yes, the hybrid theoretically puts them in contention in both markets, but I strongly believe that the handheld and home markets are separate and distinct, with such separate and distinct needs that attempting to appeal to both dramatically reduces its appeal to both.
We needn't look too far to see this is the case. The PSP's main message was "console gaming on the go." So is the Vita's. Prior systems have tried it before too, most notably the Sega Game Gear and the Atari Lynx. None of those has succeeded in winning over the handheld market. All of them but the PSP have in fact been unmitigated financial disasters, and I would argue that the PSP did best when it started to offer games like Monster Hunter (which is a handheld series first and foremost: c.f. sales of Monster Hunter 1, 2, and Tri with the portable entries) rather than home console type games (see: GTA, Metal Gear Solid). The 3DS is another good example: offer Resident Evil, Metal Gear, and Ocarina of Time? System flop. Offer Animal Crossing, Fire Emblem, and New Super Mario Bros? System sales increase noticeably. In other words, "best of both worlds" sounds great on paper, but in practice it has so far led to strong evidence that trying to appeal to everyone leads to satisfying no one.
Second, there are lots of foreseeable technical problems. I am still concerned about battery life, for example: there's only so much you can squeeze out of minimizing your OS, and technological advances in battery life have been so relatively slow that overall hours has been largely stagnant over the past twenty years. The iPhone 5s' time, for example, is barely more than its predecessors, for all the hoopla made about it. Perhaps there will be a radical expontential improvement soon, but that will be completely independent of Nintendo's own efforts, meaning relying on an exponential leap which has not occurred in decades is risky at best. Nintendo has certainly failed miserably to come up with a solution on its own: the Gamepad's life is atrocious, and the 3DS and 3DS XL are little better and fall noticeably short of prior Nintendo handhelds in this regard. Nintendo is completely at the mercy of other companies' engineers in this regard, and since those engineers have understandably failed to keep pace with other technological improvements the improvements they've made are swallowed up by the increasing energy demands of faster processors, better graphics, etc. I see little reason to hope that the trend will be reversed, barring an unforeseen technical breakthrough.
Moreover, I think you overestimate just how good Nintendo is at making new hardware. Their genius, as far as I can tell, lies primarily in streamlining internal components such that they squeeze more power from outdated hardware than other companies. They have not, however, particularly excelled in other aspects of hardware recently. The original Gameboy Advance suffered from poor contrast and the absence of backlighting, to the point where it was unplayable outside narrow circumstances: it took several years before those issues were addressed in the SP. The original DS was bulky and remains largely mocked, simple issues which were not fixed until the Lite. The Gamecube's hardware design is unappealing at best: leaving aside the lunchbox handle problem for the moment, the controller was visually unappealing, ergonomics be damned, and I believe the form factor repulsed more people than it attracted. The Gamepad shows they still haven't mastered how to create a controller that's both comfortable to hold and look at. Most of the hardware behind the Wii was either purchased from a third party (motion controls), or outright stolen from a third party (console's colors and form factor). Making the controller ape a remote WAS genius, although I stress that came about because Nintendo's philosophy at the time was to observe what technologies the masses were already comfortable with and then conform to that as much as possible. They still couldn't get the precision of the Wii Motion Plus into it for another several years, though. Finally, the 3DS, hardware wise, had several problems at launch, including wobbly hinges, shoulder triggers that clogged up easily, unfortunate placement of the circle pad, and often unavoidable screen issues caused by closing the system. This is especially astounding in light of the fact that they essentially copied their DS Lite and made some relatively minor adjustments! In other words, I am not yet willing to have faith that Nintendo can recognize and avoid important visual/ergonomic/practical hardware issues when it comes to its system, notwithstanding literal decades' of practice, so I fully anticipate that any entry into creating an entirely new hybrid piece of equipment will meet with several large, potentially damaging oversights and flaws.
Finally, I believe putting all of Nintendo's eggs in one basket may run the risk of increasing their losses, without substantially increasing the prospect of profit. The issue was raised previously, but having two successful consoles running simultaneously lets one failure be offset by another's success. The Gamecube/GBA era is an excellent example of this, although the N64/Gameboy days are also relevant to this discussion. Your rebuttal that focuses on simply one console reduces the R &D costs by half or so is correct, of course, but I would point out that (until this generation) Nintendo hardware paid for itself and brought in a profit, because the old philosophy of using older, cheaper technology meant that they could squeeze more dollars out of each unit than their competitors could. In other words, if they return to this philosophy in the future, their risk of losing money on a console is relatively small. See the Gamecube, which in the end paid for itself with a bit extra on top, notwithstanding shameful hardware sales. If Nintendo proceeded solely with the Wii U right now, its financials would be horrifying, and I suspect that having more Nintendo games currently available would not improve its current standings by much at all.
Conversely, when each system is hitting its groove, the potential for massive profits is enormous. Nintendo could not have become bigger than Toyota with just the Wii, or just the DS. The early 90's were better because they had the SNES and the Gameboy. The two markets have a track record of being different and largely distinct, with their own separate needs and qualities (see point one). Why merge two markets, with two distinct revenue streams, unless it becomes absolutely necessary? And I don't believe it is currently necessary: as I said before, the only advantage I can see to a hybrid console comes from being able to focus software development resources into only one platform at a time, but there are stronger alternative solutions which don't involve trying to force handheld consumers and home console consumers to play by Nintendo's rules. I was advocating Nintendo to ramp up the size of their development group way back in the middle Wii days, when it became more and more clear that they would have to go it alone in the future. Nintendo itself warned companies for years about the dramatically increasing need for larger development teams required by HD games. In spite of this, Nintendo has only grown moderately in size since the last generation. Its current woes are entirely self-inflicted, in more ways than one, but the lack of developers at least can be remedied by investing in more development teams and returning to the strategy that gave birth to so many of the big DS hits in particular: smaller teams, with shorter development times, whose sole goal is to make some kind of compelling software by working around limitations rather than brute-forcing their way into making their ideal game come true.
I submit that the handheld market and the home console market are separate and distinct, and that the two are not yet prepared to merge. I further submit that any attempt to force consumers to change their habits to suit the company's needs is almost certain to fail. Finally, I submit that making a hybrid system that attempts to be both a home and handheld console will at worst be an attempt to shape the market to fit what Nintendo wants rather than what the market wants, and at best it will fail for trying to please the drive-through burger crowd and the steakhouse crowd by offering an unhappy compromise between the two that neither will particularly want. The plan has its advantages, but I don't see enough reason to believe it will work.
