Yeah, I agree...they could just wait 1-2 years and release PS4/X1 equivalent hardware cheaper...
They can't really compete that way on hardware. PS4 is going to price reduce as fast as technology allows. There are no annoying features like Cell getting in the way of common die shrinks. Regards hardware, Nintendo's best bet is probably to wait until tech has had a significant leap (HMC, stacking, etc.) and provide better bang-per-buck with better overall performance.
maybe close to the PS4 architecture to make porting easier.
Nintendo need middleware. MS and Sony aren't too proud to use middleware for plenty of their first/second party exclusives, and it'd aid Nintendo's development no end, as well as opening the platform to 3rd parties.
But then I wonder what the goal audience would be: only people who like the Nintendo exclusives. Everything else can be found on other consoles with probably better online service.
That is the issue. PS4 and XB1 will be established, have extensive catalogues, yada yada. However, Nintendo could compete with offering the best singular game experience with better graphics and higher framerate, plenty of library as long as they go standard PC architecture and ports are a doddle (I'm assuming new techs will be easily compatible with current techs. No reason not to), and, I guess, some advanced gimmicky tablet controller type thing. So they could offer a compelling product. It'd take a mammoth effort though. They'd have to complete shake up how they do things, become open, get devs on board now, offer extremely attractive terms so devs will bother to port games, and then have a killer marketing campaign that combines cool with kid friendly and metrosexual class.
Failing that, my suggestion is go software only. The hardware race is an unpleasant one and not particularly profitable. The console market is basic a legacy market from a period when hardware was expensive to produce and few options were available. Now there are game-capable devices everywhere, and there's more money to be made riding those devices then trying to sell hardware, unless you get an unpredictable hardware success. Even Sony are looking (slowly) at software on non-Sony platforms. At some point, whether PSM or Play Now, people will be paying Sony to play PS games on whatever devices they own. MS want the same for the same reasons, but have a OS heritage they are trying to leverage to that end. Given where Nintendo are this moment, they could make a helluva lot more money selling Nintendo games on iOS and Android. Nintendo's game-design philosophy would work very well on those platforms, and they are already open to more lucrative financing opportunities (in game content at stupid prices). Plenty of DS games have had clones on touch devices - Nintendo should have got there first.
If i was given Iwata's job tomorrow, I'd look at both. There's enough cash to investigate new hardware and pull out if it proves a weak option. Nintendo, always respected for its game design, could do very well on every other machine out there.