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Let's look at the realistic worst case for Nintendo in the next generation, and assume the Wii U and 3DS only sell to 60% the level of Nintendo's previous generation systems. That would mean that the Wii U would only see 60 to 66 Million systems sold, and the 3DS would only see 85 to 100 Million units sold; hardly a "failure" that would require Nintendo to become a software only company.

One day Nintendo may become a software only company, but that will probably not happen in the next 10 years.