the difference between nintendo and sony, from microsofts perspective, is that nintendo is content being basically a video game only company. sure, they have recently broken into animation, but i think that is more a natural progression (their characters have been featured in numerous animated shows and movies). sony, on the other hand, very much wants to be a leader in the "does everything set top box" arena (games, dvr, movies, music jukebox, sell ratings info to nielson, ect...). a market that microsoft is also fighting for. windowsXP MCE isn't an accident, it's a glimpse of the future.
so nintendo isn't really competing with microsoft, they are competing with sony for video game supremacy. and microsoft wants sony out of the living room.