You are right. Nintendo needed to go the route of a new "novelty" with a not so powerful console, like the Wii, which has been a success, rather than beefing up the system to directly compete with the PS720, which has not been a big success for them with the GC and N64, which were both very powerful consoles but still got beat by competing consoles.
The only caveat to this is that the Wii U's "novelty", which is the Gamepad, hasn't caught on to the Wii's consumer base (parents, grandmothers, etc) or some other untapped market like the Wiimote did many years ago, which is what propelled Nintendo to such amazing heights. People seem to think that the Nintendo enthusiasts who bought the Zelda/Mario/SSBB games were the ones who singlehandedly made Wii what it was, which is not the case. The Nintendo enthusiasts alone will bring Nintendo N64/GC level sales as proven before. It is the rather the combination of Nintendo enthusiasts AND the "casual" market that brought them the Wii level success, and this ratio is probably lopsided towards the casuals more than the enthusiasts.
Now if we look at the Wii U, Nintendo rightfully tried to emulate what they did with the Wii, that is bring in another novel controller which will garner the attention of the wider fanbase once more. It was a high risk, high reward strategy, but that strategy so far seems to have failed. The "casuals" that came in last time don't seem to be picking up on the gamepad craze. So all Nintendo are left with now for the rest of this generation are the Nintendo enthusiasts who will buy the console and the Nintendo exclusives as they have been doing for years past. But we all know what happens when a Nintendo console is only supported by the Nintendo enthusiasts: N64/GC. Thus the Wii U as of now, given Nintendo releases all their exclusive goodness will be heading towards a N64/GC kind of future.
This could only change if somehow Nintendo managed to bring back all those mothers/grandmothers who bought the Wii en-mass, or some other market we have not seen before, but you can judge for yourself for now whether that will be possible with the Gamepad, like it was made possible with the Wiimote. We will just have to wait and see.
