The biggest problem you get when you have the system with the best graphics is the "get used to" - syndrom.
Several experiments proved that you get used to the graphics you see in about one week by playing games 1 hour a day. That means when you got used to the good graphics they are not interesting any more cause you expect them to be there.
When Sony released Resistance nobody got crazy because of it cause there was already Gears of War which had much better graphics. But when Nintendo released Metroid Prime Hunters for DS everyone was impressed cause they were used to weaker graphics on the system.
Graphic is not a selling point for any system. When you see them you get used to pretty fast - just play 4 hours of Gears of War and you wouldn´t notice the impressive visuals anymore.
And then you get to the real problem: The system with the better graphics has the higher price too. And than the price is more improtant.
No, Nintendo won´t fail with the Wii cause it has weaker graphics. If they fail they will because they don´t have enough good games. Nobody needed huge environments 10 years ago and you don´t need them today too. At least I don´t need a Hyrule Field that is 3 times as big as the one in Twilight Princess cause you wouldn´t get to an end anymore... and I don´t need Oblivion with 4 times the size cause it was really big enough 
But FUN is something that get´s never boring (of course...) and fun is what really sells a system. It sold the NES; the SNES and the playstation line. Of course some people will say different things but it´s just the truth.
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