Basically the gaming industry has gone mainstream.

To be honest, I haven't given that enough thought. I'm confident this particular divide will (mostly) heal by the time the generation ends. We went through something eerily similar with the DS just a few years ago, for instance (check out articles and forums from 2004-5, for instance), and that's pretty much worked itself out.

Moreover, my reading of the situation is that the hostility directed towards the console newcomers is right around Step 4 in the healing process right now: all but the most devout developer, for instance, at least gives accessibility and the expanded audience lip service (see, e.g., CliffyB's comments about Gears of War 2, and how he hoped it would also hold some appeal for the expanded audience). By contrast, many of those same developers were dismissive, if not outright hostile, towards the new values back in 2006 (classic examples: the duct-tape speech, "non-gamers").

If you're still interested in hearing my thoughts, I'll be happy to give them, but let me tell you upfront that I haven't thought this through all the way.

This generation is the Interaction Revolution, between the Wii and motion controls, or the advent of stuff like voice chat, user-generated content. All in all, this generation has seen consoles do things never before imagined. Between Sony and Microsoft and the push to make consoles more versatile, and Nintendo's push to make consoles more accessible, we'll see them re-converge at the start of next generation, incorporating the best of both worlds.

schism with a separation of two healthy gaming markets in the future... unless somebody does something stupid like put a new console out before 2012 if they do that it causes a crash in the next generation. I have explained this in more detail in past posts but really dont want to go looking into my post history to find it right now... need to remember to book mark it and not hunt for it each time i need to repost it

All other things equal, better graphics will be more attractive to a prospective buyer (ignoring the uncanny valley), so yes, graphics will count for something no matter who you're selling to.  That said, the key to understanding the Wii's success comes from knowing at what point pouring resources into graphics cease to generate as big a return on investment as paying attention to other aspects of the game.  By capitalizing on these other aspects and rolling them into the Wii's successor at a hardware or firmware level, it's very possible for Nintendo to put out a new system and hold the lead in the Eighth Generation.  The literal million dollar question here is what other aspects will bring their new audience back for more, and what they can do to counter the inevitable copying of ideas from Microsoft and Sony.

Why didn't Grandpa and Granma buy PS2's last generation, and go for Xbox 360's or PS3's this generation when they clearly have better graphics than the Wii?

Because it's a pain in the ass for a person unaccustomed to dual analog sticks to use and control it, while anyone with some basic knowledge of tennis, golfing, etc can instantly play Wii sports.

I don' think those casual gamers would be interested in buying a more powerful Wii, because graphics aren't even an factor for them.

Graphics are always a factor to every audience.  They're just not the only one, which is why I included the "all other things equal" qualifier.  There are many, many things that the Wii's successor could do in addition to the requisite improvements in graphics, and those are the key to retaining and expanding their audience.  For example, they could improve their online gaming infrastructure, create something powerful but idiot proof while working within their constraints (we can all agree Friend Codes are a travesty of coding that should never have been, right?).  Or, they could branch out into user generated content a la Spore or LBP, and make it incredibly easy to share user generated content.  These are just examples, and probably aren't the exact answers, but the point is, there are probably many more avenues of focus that could make the Wii's successor a compelling buy, even if they were to keep their control scheme and make another marginal increase in processing power.

No matter how hard people want to deny it, this is and will be known as the gaming Renaissance . For the First time gaming has hit the main stream and allowed for gaming to become a standard.
Nintendo or not it is the AGE OF THE EXPANDED/
learn to live with them or parish.

But lip service is all it is.  They have to find some way to appease their own stockholders, but actions speak louder than words, and there's been no indication that any action is being taken.  Consider, for example, Valve's repeated comments on developing for the Wii, with the first dating back to January 2007.  So far, the score is still PS3 1, Wii nothing as far as their games are concerned.

Fully granted, but even the lip service is a step in the right direction, a step that a 2006 observer likely would not have anticipated. That so many developers and CEOs are publically admitting that they "bet on the wrong horse," or that they were incorrect in their initial assumption, is something I can never recall hearing before.

Moreover, I believe you're understating the importance of that lip service: where not too long ago it was not only widely accepted, but almost applauded to express hostility towards the expanded audience, now there are only a few people in the industry who are willing to be so open about their prejudices. Granted that some of this is likely due to pressure from the top, rather than any heartfelt change in sentiment, but the fact that such behavior is now (mostly) frowned upon is indicative that things are getting better.

Plus, isn't this the pattern many groups undergo when experiencing a paradigm shift? Individuals may continue to feel the pull of the old ways at first, but as time passes they mostly adjust their behavior and accept what the rest of the group is doing. It's only been one year since the Wii stopped being a "fad" and already things have changed dramatically; how much more will they in four years?

Plus, it's tough to fault Valve there: with just a bit of effort the PS3 can handle their games. The Wii, on the other hand, would need radical changes to run Left 4 Dead, etc. Valve already works at the speed of mollases on their core projects; expecting them to spin off a team to make a Wii game would be detrimental to my Half-Life 2 Episode 3 dreams, so I'm okay with them as-is. Plus, I believe that while Newell did say that he was interested in making a Wii game, Valve wouldn't be able to start doing so for several years. He's not being dishonest, he's just being realistic.