I think you're ignoring certian realities into the equation.

360Arcade is $199 (at a profit).

WiiU will have larger cache, 3x the memory, far newer CPU, far newer GPU, tablet-esque controller, wiimote, nunchuk, and a bunch of software/a game. That easily pushes the price up $100 in order to keep a profit.

Also the console is a little misleading.... its quite long from what I've read and larger than Wii in other areas as well.

a 3-year system? What does that mean?

Even assuming the controller costs about $80 to mass produce/unit, that's still a ton of budget left over for the chipset. 

It doesn't matter what the 360 costs to make, it's a dated architecture. Nintendo with access to modern tech would be able to get far better CPU and GPU for the same price. 

The real reason the CPU is likely gimped is because they could not shove a powerful CPU into a casing that size with a GPU that size without having heating issues. So instead of doing something sensible (like opting for a bigger casing), they probably chose to keep the small casing, but gimp the CPU and pocket a few extra bucks in cheaper component costs. 

It sucks, but I have a feeling that's the truth. If they really wanted to they could've absolutely smoked the PS3/360 even for $299 even with an LCD slapped onto a game pad. But hey ... at least we all save a few inches of space on our TV stand. All this so soccer moms can have a "cute" sized console. Whoopity doo. 

Sure, we should all have consoles that are the size of PC modems. /sarcasm

How do you know the CPU is gimped? The clock speed is lower, but that doesn't mean it isn't more powerful. I guess the CPU for the PS4/720 will also be gimped because of the very same reason (that's if the speed is lower).

Just for the record here, what price do you expect the PS4 and Nextbox to launch at, and around what time? 

It's been stated by multiple sources this is hardly the first time we've heard grumblings that the CPU is fairly weak. In any case, "slightly better than a PS3/360" to begin with is pretty sad from a hardware POV. We shouldn't even be having this dicussion. 

The Wii U is seven years older than an XBox 360. The Dreamcast was released 2 1/2-3 years after the N64 and completely destroyed it (Soul Calibur vs. any N64 game is no contest). Both systems launched for the same cost. 

I'm not saying specs are everything. I'm sure Wii U will be a fun console for those who like Nintendo franchises (like myself), just from a hardware perspective, the Wii design philosophy is clearly not the same as the SNES/N64/GCN days. I remember reading about how Nintendo designed the original Wii and the philosophy behind the hardware having to be very small/quiet because Nintendo's research indicated that women in particular don't like larger consoles. 

Wouldn't surprise me at all if they did opt to scale back what the Wii U could've been because they were unwilling to let the console be larger than a certain size. I don't think this system is at all the best IBM/AMD could've given them even at a reasonable cost. 

"Nintendo is obsessed with released tiny consoles even though there's no practical purpose for it unless the console is meant to be a hybrid portable device"

Do you even know what your talking about?

Gamecube was tiny in comparision to the ps2 yet it was more powerful. You do realize that technology get's smaller over time right?

Look at the original ps2 compared to the slim verision was it weaker? No?  Do you even know anything about tech? What's next your going to say PC are weaker than the 1940 PC because there not taking up the whole room?

Where is your logic?

"But their "marketing research" has told them soccer moms prefer small, unassuming looking consoles, so we're all hooped by this need. "

Read this over to yourself and tell me you seriously believe that makes sense.

"Even at $299.99 with a touchscreen pad, there should still be a decent enough budget there to smoke the PS3/360 outright, this shouldn't even be a question. "

Only people questioning are internet people because they seen games worked on for like a year on a system that has been out for a year and half MAYBE. Xbox360 games 2005 did that smoke the original xbox? No.

"But when you force an arbitrary need into the equation, like the console casing having to be a fixed size, you have to start doing things like gimping the CPU to meet a certain heat output, because otherwise your case will just melt. I wouldn't be surprised at all if the Wii U has overheating issues even as is. "

You can't have a low CPU and overheat that doesn't even make sense. How many times did the Wii overheat? none.

Are people actually Believing this?

I'll believe this once it comes from Nintendo's mouth or at least from a reliable source.