1) The Hardware isn’t powerful enough at a reasonable price.
The HD consoles demonstrate this problem because they’ve increased the cost of the hardware to consumers, produced massive losses for the console manufacturer, developers are constantly struggling to get adequate performance, and few games run at a high frame rate (60fps) at a HD resolution.
This isn’t saying anything against the HD consoles, but if you’re Nintendo and you want to release an affordable system ($200/$300) while not losing much money selling the hardware producing a HD console in the mould of the PS3/Xbox 360 was a non-starter.
2) The industry wasn’t ready yet
How many third party publishers have reported record profits in the past few years? This is at a time when there are 180 Million current generation consoles and handhelds, the PS2 has strong sales, and the total industry software sales are at record highs.
The fact is that most publishers have maintained a business model for years where a handful of big games sold so well that their profits easily covered their entire development budget. This strategy worked really well when you’re dealing with an average development cost of $5 to $10 Million, with “Big Budget” games in the $20 Million range, and your big game generates $100 to $150 Million in revenues. When your typical game costs $20 Million to develop, and your big game costs $100 Million to produce, (and you still have marketing costs to consider) generating $150 Million in revenue is not that great anymore.
3) Developers aren’t ready yet
Developers with a long track record of producing games on time and under budget with average review scores of 85% or higher are running over budget, and either see massive delays or the games are dumped to market even though they’re unfinished and low quality.
It’s going to take years for the project management, development methodologies, and corporate cultures to catch up to the technology so that they can consistently produce high quality games.
4) To Send a Message
I could be wrong but I suspect that inside a lot of developers and publishers there was probably a discussion about how they could survive in a market where development costs were rising so rapidly. There were probably quite a few maverick executives within these companies that suggested that the increase in development costs were entirely optional; no one was forcing them to take full advantage of the latest and greatest technologies, and gamers really want enjoyable (new) game experiences.
It is likely that Nintendo faced this argument internally, and may have even have had it with many third party publishers. To a certain extent, I think a company like Nintendo (which is so involved with making the industry what it is today) feels an obligation to ensuring that the market remains healthy for all companies.
The Wii has produced booming statement "Graphics are not the only thing that matters! As long as a game is fun people will want to play it!" and hopefully developers have heard it.
5) Manage the Risk of the Wii
This is probably the most important reason. In spite of their confidence, everyone inside Nintendo had to be aware that the Wii could fail on a massive scale and they would have warehouses full of unsold systems; or that the Wii could just cruse to sales similar to the Gamecube with Nintendo being the only developer supporting it. With this risk, Nintendo had to turn a healthy profit off of every system sold, and they simply couldn’t have a system where game development costs skyrocketed and games took dramatically longer to produce.
