@Million: Nintendo's business practices have kept them one of the most profitable companies (relative to their size) around. They don't take risks like Blu Ray, because it isn't a smart move. Selling hardware at a loss is not a great business model.
The problem with the PS2 is, its success didn't have much to do with Sony's software. It relied almost entirely on third party support, its PS1 momentum, and its one year lead. This demolished the competition because the consoles later released (GC/Xbox) played nearly the same, offered a much smaller library, were less popular and were up against the PS2's momentum. Anyway, even with all this on top of the PS3 screw ups, it still may overtake the 360. That would basically mean it's still "first," if you don't count the Wii (a disruptive console, something that will likely not appear next gen).
On the other hand, Nintendo has proven its ability of capturing the mass market with their own software. They learned the hard way to cater to more than just the core demographic - no other company has captured girls / women / children like they have. They're a dangerous company at #1, because none of their top selling exclusives will leave their grasp. Just imagine how much better the PS3 would have fared if it kept all of its major PS2 exclusive franchises...
Since the ball is in Nintendo's court now, the only way the lead can be taken away from them is if they're disrupted. This means another Wii-like breakthrough... a nextBox / PS4 with just upgraded motion controls, multimedia features and graphics cannot win. They will need a new weapon if they want to take Nintendo's new spot.
Er, now on to the topic (your first argument) - I think they aren't upping the software because they're satisfied with what they've got now. There's no need for them to buy new studios unless it's filling genres they don't cover, or ... or something like that. I imagine they prefer their small size, it makes it easier for them to change directions.
