Nintendo has proven, with the Wii that people are looking for a new gaming experience and are willing to try something new. I am certainly a believer in gameplay over graphics, but both would have been great. You have to admit that graphically, there are some games on the 360 (and PS3) that are jaw-dropping.
Assuming I was in charge at Nintendo, I would already working on Wii2 that would push the graphics engine closer to where the 360/ps3 are at now and be working on a faster and more responsive wii controller. By maintaining 100% backward compatibility and only adding new features and horsepower, a newer Wii could be brought out within 3 years or so at which time the graphics chips and cpus will be cheaper and the HD race in terms of screen resolution and format will have, for the most part, been decided.
I'd also spend some of the current income stream on developing some new IP. Mario et. al. are getting a bit stale.








