Simply put. If MS and Sony give Nintendo two years on the market without releasing a competing console they are screwed. Nintendo completely dominated the market with the NES to the point were the average consumer thought anything video game related was Nintendo. They let Sega establish the Genesis for a couple years before the SNES launched and it took them most the generation to regain the number 1 position in market share. Even then Sega retained a sizeable portion of the market.
Nintendo is number one in marketshare. Giving them two years to court 3rd parties and "hardcore" gamers would be foolhardy. Neither Sony nor MS could claim to have the most powerful console any longer. Some developers are already complaining about the "limitations" of the HD consoles. They'd be playing right into Nintendo's hands.
There was reason that Sony rushed the PS2 to the market a year early. Even though Sega was in financial ruin, Sony knew that giving the Dreamcast two years on the market unfettered would be a mistake. They saw what happenend with the NES and the Genesis and chose not to repeat the mistake.
