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I would be OK with a Nintendo-Sony alliance, Nintendo driving the handheld and Sony maybe being the driver of the console side, but both supplying software and having equal amounts of input into hardware design.

I think that would yield a console better than the PS2 or Super NES even, so I can't see how that would be bad for consumers.

Honestly I think we might be headed not towards a video game collapse but a large shrinking of the market, one which will impact Nintendo the worst because they relied a lot on fickle casuals. Sony/MS will be insulated a bit more because "mainstream" gamers will still need their shooters, sports games, etc. but Nintendo is left only relying on their core Nintendo fanbase, which isn't enough to sustain a console platform beyond 30 million units I don't think.