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The problem is that Nintendo fears losing control of it's company and its products so it won't do a team up. I think Nintendo would have had the primary control of a Microsoft partnership believe it or not as long as Microsoft got it's money. They would obviously want a hand in hardware and software development and they would have laid out a brilliant online service.

The industry would be radically different today had this occurred. Microsoft and Nintendo kind of covers each others weaknesses. I'm sure Microsoft would be more than happy to handle the marketing and promotions if they saw a return for it.