If a person pays careful attention, then they will find that there are actually a lot of potential gamers out there that are only being marginally catered to. The two markets for console gaming are the home market and the handheld market. But within those two markets there are a variety of customers. There are always some people on the high end who think, "this is nice, but I really wish it were even better. I'd definitely pay more if this were better." There are also people on the low end who think, "That looks really nice, but it's out of my price range. If the price drops enough then I'll definitely buy, but it's just too pricey right now."
What the Switch is doing right now is that it is appealing to both the low end of the home market and the high end of the handheld market. On top of that it is extra appealing to people who are in both markets. So let me describe these three groups.
1) Low end home - These people are buying Switch for Nintendo first party games. The PS4 or XB1 can basically be found for the same price (or possibly cheaper). But there are people who will buy a Nintendo home system for first party games and these people are included.
2) High end handheld - These people are extremely happy. The choices last gen were the Vita or 3DS. Switch hardware is so incredibly better than the 3DS. For example, 3DS games output in 240p while Switch handheld outputs in 720p. It's like handhelds skipped a generation. Because of this Switch can also bring new types of games to handheld gaming like Zelda: Breath of the Wild. Vita users are also very happy (like Ganoncrotch said a few posts ago). It's a more powerful system, but it also has a much better game selection than the Vita had. Happy customers are also more likely to buy more games. A person who plays Switch only in handheld mode is going to buy more Switch games this generation than they did 3DS or Vita games last generation.
3) People in both home and handheld market - These people are probably the happiest of all, because they get two systems for the price of one. There are people who bought 3DS and Wii U. For these people buying a Switch means they basically bought a Wii U and got a 3DS for free. Same goes for everyone who owns both a PS4 and a Vita. The "two systems in one" means they are getting a really huge value.
So, these are all the people that the Switch is currently attracting, but there are more it isn't getting yet: high end home, mid-range home, mid-range handheld, low end handheld. When the Switch Lite comes out, then Switch will get the mid-range handheld crowd. This is an even bigger chunk of the handheld market than they are getting now. I don't know if Switch will ever become cheap enough to get low end handheld. It needs to drop to $100 or less, and I don't know yet if Nintendo will let Switch get that low in price. Switch will never, ever get the high end home market. It just isn't designed for that. However, in a couple of years Switch will have a huge library of games and PS5 and Scarlett will have $500+ price tags. I think at that point most of the mid range home market will buy a Switch.
So, basically Switch is getting the Wii U market, and the high end 3DS and Vita market. And the people in the high end 3DS and Vita market are extremely happy with the system. They are getting a very powerful handheld system with a great library of games. As a handheld the Switch is a huge step up from the offerings of last generation, and that is why people are happy to buy more software than before.
Exactly! I've been saying for years that Switch is like a Wii U, 3DS, and Vita combined.