Wii's currently selling like gangbusters, so we just take it for granted that Nintendo could have designed and built a much more powerful machine and still sold it for profit or breaking even at $250....But it was a risky machine. What if it had an anemic launch similar to what PS3 is experiencing?
I disagree on two points. First, the hardware is profitable by a good margin and we know confidently that better hardware could be sold at no loss. If instead of selling gangbusters sales of Wii were anaemic, that'd be zero loss for Nintendo on hardware still, instead of small profits. The truth is a console lives or dies on install base, and no matter what it costs to make, if you can't get the sales, you're jappered. If Wii cost only $50 to make but Nintendo couldn't sell the thing, it'd flop. The only benefit of a lower production cost is lower price on the market, and Nintendo didn't follow that. I guess there is a case as you suggest that they wanted a low price and originally were targetting a <$200 pricepoint on cheap hardware, but decided from public reaction they could charge more. However, the major issue here is an opinion that the cost of improved hardware wouldn't be that much, which leads me to my second disagreement.
I don't think anyone was expecting Nintendo to invest the same amount of money as Sony and MS to create a comparable machine. It's the fact that for little more money they could have had better hardware. A 9800 derivative at 90nm would probably be sized about the same as Hollywood, using my quick Googling and back-of-the-beer-mat calculations. Getting Wii level graphics with 4xMSAA and proper alpha blending is not an expensive thing. Had Nintendo done this and Wii flopped, they'd be in no worse of a position, bar perhaps $20 per unit, than if the current Wii design flopped. Sure, if they had invested $2 billion in custom hardware and the machine flopped, that'd be bad. But we're talking a theoretical pricepoint not that far removed from Wii's current price, but with noteworthy advances. The real financial impact of improved hardware comes with gangbuster sales, and many millions in lost hardware profits. It could be Nintendo hedged their bets with room for a very low price. It could also be they expected good sales and penciled in hardware profitability in their design choices. As gamers we're used to console companies putting in better hardware at initial cost, where they make the money back on the software. As gamers, it'd have been nice for us if Nintendo had kept with that tradition, rather than go with an Apple model of making money on hardware and software combined.
Anyway, as Ooh-videogames says, what's done is done and there's no point lamenting it. I was only posting to point out to some that there isn't really any price/cost consideration for Nintendo's choices. They could have, at perhaps slight extra cost and some impact on hardware profitability but nothing catastrophic, produced Wii with Wiimote and better capabilities than the machine they chose to produce.
