My argument for why I think Microsoft and Sony will both pursue hardware that is at least a modicum more powerful than Nintendo's is the following: because if all three console makers release equivalent systems in the aftermath of this generation, I simply don't see how Nintendo doesn't make even greater strides. Remember that I'm not saying Microsoft and Sony are looking to abandon the casual gamer - on the contrary - I just think they wouldn't want to put themselves on a playing field where hardware ceases to be a differentiator whatsoever, and suddenly it's just up to marketing, first-party title appeal, and console relative install base. The console 'wars' are littered with dramatic reversals gen-to-gen, but given equal weighting across all categories, truly I think next gen more than most Nintendo would go in with a very strong advantage.
I believe that Sony and Microsoft will take much less expense-related risks in the next-gen as well (as posts of mine in the Next Gen Technology threads illustrate), but I do think that they will try to stay ahead of Nintendo, and to the extent they can, dance the tech-lead dance with each other as well.
Ninny has a Wii2 issue: Developer ability. Look at the growing pains devs have had, and now imagine most of Ninny's internal staff effectively taken a multi-year hiatus from attacking such throny issues.