I think there can be room for three consoles. Just probably not the Wii U.
Honestly, I think a low cost Nintendo system has a good shot at the "second console" market. Assuming they continue with substantially lower specs than Microsoft or Sony and they only go with cheap to implement hardware gimmicks/innovations, I believe they could see good results as the system's library of games continues to grow. It might be hard at first, with only Nintendo loyalists buying, but such a console would see interest mount as the price went down.
The Wii U, hopefully, is no better a benchmark than the Wii. Both might very well be anomalies: the Wii for going viral with the fickle casual market and the Wii U for being an expensive console with low specs.
The important thing is that no company has to be "number one" in order to be successful. Nintendo could ship a low cost, low spec console that shows a profit day one and then start generating revenue with their software. It won't matter if they are first or if they're third.
The only other option would be to directly compete with Microsoft and Sony, something which they've shown little capacity to pull off. They can't be a generation behind on features and expect to win head-to-head. The safer strategy would be to drop back to the budget market.
