I honestly think that the main reason why the Wii is underpowered, and why Nintendo went with this is because the wiimote was a risk.
They didn't know how it would perform on the market, so they wanted to minimise loss in case it failed big time, this is why they made the specs of the console so low that when the wii sold they got profit from the get go on hardware alone.
Nintendo also knew they simply couldn't compete with Sony and Microsoft both in hardware, and appealing to the hardcore gamers. They were forced to do something else in order to stay alive, so they turned their focus into a market where there was no competition and took a risk with the casuals, and struck oil.
Now how long the oil well will last is up in the air, because no one else has set a precedent for this yet, it could just turn out a fad when all is said and done, but then again it could be the next PS2, one can not predict anything because no one has done this in the past. All I can say is that the Wii will either go down in history as the biggest fad or as the generations winner.
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