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I think you need to turn this question around and ask why the PS3 and Xbox 360 are so much larger because I believe everyone would prefer a nice compact unit. Space in many entertainment centers is precious.

The answer, of course, is they are larger because they are hotter. All those processors generate a lot of heat and heat sinks, air buffers and fans take up room. Otherwise I very much suspect that all the real electronics would fit in a Wii size box .... which would melt the minute you turned it on.

I saw a 3rd auxiliary fan for the Wii to prevent "overheating". I asked the manager if he had ever heard of a Wii overheating and he said "No". I asked him why they made the fan then and he just smiled and shrugged.