If you have rushed in this thread ready to post 'they all play games', think about it for a moment - radios, MP3 players and sound systems all play music. Are they competing? Obviously not. I've tried to think of the ways that the two console styles are similar and drawn a blank:

Same control scheme? No, traditional vs motion.

Same business strategy? No, attracting old gamers vs attracting new gamers.

Similar price point? No, the Wii is noticeably cheaper than a high end PS360.

Similar gaming experience? No, very few multiplatform games are on both the Wii and the PS360.

Similar target audience? No, young teens/males vs families, children, older people and others.

Similar marketing strategy? No, PS360 is marketed as a high-end multimedia device with emphasis on online play, the Wii is marketed as a games machine with emphasis on local multiplayer.

Similar size? No, the Wii is noticeably smaller than the PS360.

Similar mainstream view? No, the Wii is viewed in a more positive light than the PS360 in the mainstream media.

Similar online service? No, limited vs comprehensive (though this is changing, they will never be at the same level).

I think everyone has come to realise that the Wii will win the console war, but owning a PS3/360 and a Wii is the best choice for gamers. This is totally different to last generation where owning a PS2 or a PSOne was more than enough with all of the consoles being mutually exchangeable and most of the above comparison points were actually applicable. If the video console market had anywhere near as many competing companies as the MP3 player market, the Wii and the PS360 would be seen as polar opposites. Sony and Microsoft repeatedly state that they are not competing against the Wii, only each other. Many see this as a PR move because of how badly they are losing the war, but there is quite a lot of truth to that sentiment.

This leaves the question of what exactly is the Wii competing against if not the PS360?

So original. I mean never seen a topic like this in the last 2 and half years in forums.

Yes it's competiting with them. If it wasn't then it'd be a monopoly in a market of its own, and the market that PS360 was in would be completely failing considering those kind of sales comparative to the last generation.

It also leaves the question of why this is being asked again, unless you have some ulterior motive.

I think they are in direct competition when you know there are people who are deciding between a wii or an hd console. There may be few of them, but it still happens and that means they are competing for the sales of those people.

They compete for the money of the gamers.

$200(u.s.) to manufacture a wii

Bingo.

EDIT: Not only that but also developers resources are finite so ...

A nail in the coffin.