It isn't that they "couldn't" provide a more powerful system, it was that they choose not to ...

Hypothetically speaking, Nintendo could have easily paired up a PowerPC 970MP @ 2.0 GHz with a Radeon X600/X800 and sold it for $300 without taking a large loss; and the system would have potentially been very small and energy efficient as well.

Why they didn't do this is something only Nintendo knows, but I suspect it was because they were uncertain of the success of the Wii and didn't want to expend the hundreds of millions of dollars in R&D and licencing fees to make it happen.

I don't know what they're trying to say, anything bigger than the Wii is unacceptable? The Wii is probably as small a console as we'll be seeing for a while. I'm betting the next system is a bit bigger.

$300 wouldn't have been as market friendly as they were looking for, and they probably couldn't have done it while having a pack in game at the $300 price point.

The unknown success of the Wii was a potential possibility for their decisions, but that still involves releasing the system at a market friendly price to make its chance of success greater

Just saying that Nintendo has a trend of smaller not bigger, its possible that their next system is bigger, but unlikely

In terms of the "rumored software" coming for the Wii2/N6 I think it is an influx of journalists merely trying to influence development teams to begin work on these projects, or at least bring it to their attention.

It is kind of like how IGN vehemently supported the notion that a Kid Icarus Wii was on the Wii. In that case they were half right; a KI game was being made but on the 3DS.

No company will confirm if they are working on such games, but who knows how much influence these rumors have. Journalists talking en masse was part of the reason Wii support was marred and abandoned in the first place.

It will be bigger.

Nintendo's next system is going to be bigger because it is going to do more.  People are fine with something GC size or a little bigger. Wii was small because it used GC tech several years old.

Nintendo themselves said they would have priced Wii at $300 if they had forseen its success. Supply and demand. It would have sold just as well. Wiis were selling for more than $300 online long after launch.

It goes further back than that - the N64 shunned cds. Nintendo have always worked on their own format. They will again.

Regardless, of course the Wii2 will be more powerful than the PS360, just as the 3DS is more powerful than the PSP.

Why?

The per-unit price of packed in software is almost nothing, with how well the Wii sold initially I highly doubt $50 would have been a deal-breaker, and the hardware I'm suggesting is very similar to what Apple used in their Mac Mini which was small, energy efficient, (reasonably) inexpensive, and sold at Apple's insanely high margins.

It can be the same size, or even smaller, while still doing more than the Wii, just not as much as some would want it to do, much like the Wii is smaller thanthe GCN yet does more, just not as much as many would have wanted it to do.

Saying that it will be bigger is speculation and wishful thinking than actual proof of its size and power, especially when the compnay trend has been in the opposite direction.