The GC market is 25 million. If Nintendo could sell the equivalent of 50 million GCs in the form of a portable, even if they're selling old titles, they're making money off every game. A game doesn't have to be new to be profitable, especially for the platform holder. And heck, look at sales of ancient games on the latest, greatest devices out there! Old arcade games, NES games, MSX, PS1. There's a market for (re)selling old content. A successful portable GC would be a great way to make money on existing content.
Not if it plays old gamecube discs, of which there is an extremely large market out there. Think PSP games would get very many sales if it could play PS2 games, and ps2 games came on psp sized discs from the start? The used market would cannibalize sales, if they even got that many would just be satisfied playing their existing game collection. The nomad definitely didn't drive genesis game sales.