Printing money never gets boring. At least not for profit oriented companies.

People don't seem to realise how unpredictable casuals are. The majority wouldn't even spend a cent on a mobile game.

This is where I see Nintendo is a shining light in it's policy to not make games for phones.  But do you really see Nintendo winning this battle of format of being a games only machine?  Are we going to revert back to where phones didn't play games?  In the foreseeable future, that's not going to happen.  More and more development will be placed on triple A titles for iOS, and why not?  We haven't seen that app to do that, but you hear stupid things succeeding all the time. 

Customer's now are used to the low price of little minigames, but you can't deny that the customer are just trained monkeys when it comes to forking over more money for something they see value in.  And certainly, it will not be in drones, not at first, but it will grow like cancer, until it is the norm.  It may suck, but it's a possibility that shouldn't be ignored.  Doom!

No, keep it a handheld with buttons. A phone-like machine would ruin Nintendo.

But thats the point of casuals.. And this is gonna blow your mind: It doesn't matter what the majority would do if the minority is still a 100+ million market.

clearly there is a big enough piece of the casual market that spend money on games looking at the numbers

they should make it their third pillar

But what if it didn't.  What if it was the right combination of buttons and lack of buttons coinciding within the same machine?  That's a riddle with so far no answer, but isn't it the future when there is an answer?  Which ever company is able to answer it, it will drive the next generation of mobile gaming.  There are people out there that have 3ds and phones all at the same time, rare, but there is that devotion.  How easy would it be to convince someone who had no real devotion to gaming, but see that the option is there? 

On the contrary, I am a consistent Nintendo customer who buys most of their hardware. I also do own a mobile device, though it is not a phone. The reason I have no interest in buying a smartphone is because I don't see the value to 3G. I don't want to pay to have internet access that I never use for fear of exceeding my data plan.

Anyway, if this hypothetical Nintendo phone does not appeal to the people who play Nintendo games, it will have to appeal to people who use smartphones. And in that market its competition is simply massive. Nintendo cannot compete with Apple or Google in the smartphone space any more than an Android machine can compete in the home console space (hint: Ouya). So their only buyers would be the subsection of their already existing (and admittedly small, in the grand scheme of things) fanbase who also want a new smartphone.

There is virtually no reason for this product to exist.

No, you can't ignore it. You must destroy it, before it becomes even stronger. Smartphone gaming must be exterminated! Swift and without mercy!

Phones and apps can still evolve to be easier and cheaper.
Apps can soon migrate to being browseer based, ie HTML5.
http://www.infoworld.com/t/mobile-development/forrester-html5-apps-still-not-good-native-apps-235189
When this happens the need for a special OS to manage apps may disappear.
The most popular apps, when on PC or laptop, are browser based:
http://mashable.com/2014/04/03/popular-apps-chart/
Facebook, youtube, mail all come from the browser and can go back there with HTML5 functionality.

Wifi hotspots can grow bigger and easier to obtain:
http://www.bostonglobe.com/business/2014/04/08/boston-launches-wicked-free-network-starting-grove-hall/m3JI6hmWTCvQa8Ca4ZrLuK/story.html
http://techcrunch.com/2014/07/21/google-in-the-running-to-turn-nyc-pay-phones-into-free-wi-fi-hotspots/
http://flets.com/freewifi/service.html

So basic phone functionality may soon be available trough a simple browser, and accessed in many cities with simple wifi.