My apologies Shifty... I forgot to add my bit on the end for my own Wii-NEXT prediction:
Wii-NEXT
CPU: Xbox 360 level or slightly more powerful Quad Core beastie
GPU: Maybe something a little more powerful than the current 360 GPU
Control Method: A combined "Wii-Mote/Motion+"-Mote that gives 1:1 control and maybe adds some other new quirky innovation, without all the current Wii-Mote limitations.
Assuming they drop the archaic fixed function architecture for their next console, I don't see the Wii's GPU being this weak at all really. The very lowest they could go would be ATI's current integrated graphics part and come 2012/13 that's already going to be on a level pretty significantly above Xenos one would assume.
Integrated graphics are only really one major revision away from being in the same sort of performance bracket as console GPU technology, the 3300/9400 were a pretty huge leap from the previous generation, as an example. So 2 or 3 major revisions like we can expect should produce some very interesting results.
Its not crazy to expect something around the level of the RV730 (but with upgraded DX11 level architecture/shaders ofcourse) to be the current standard for integrated graphics come the release of Nintendo's successor (in fact I'd say that's a pretty damn conservative estimate!) and strap 1GB of GDDR5 and a "quad core Xenon (or dual core OoO PowerPC chip?)" to that and you're going to be able to produce games on a level well above current console games, despite the hardware costing peanuts.
Why exactly would Nintendo insist on ATI creating a part below their very lowest performance chip? A chip already tailored for low power consumption, and low cost mass production? That sounds like the cheapest way to go for me, and it'd still provide one of the single biggest leaps between generations and be plenty powerful for a very robust software emulation solution for backwards compatibility as well.
Since the actual technology and architecture will be very similar to what's being deployed in the Xbox3 (just on a much smaller scale), downscaling a 1080p/60hz game may be as simple as targeting 720p/30hz with lower aa/af, texture resolution, using less precise lighting algorithms and a harsher LOD/draw distance. The average consumer's lack of interest in PC gaming has proved they don't mind putting up with that sort of thing, and it'd be a much better solution for multiplatform development that what the Wii has forced. As long as the Wii2 is targeted from the beginning it should be more than possible to create a decent version of your game for all three platforms this way, Nintendo benefits from more third party support and they still get to promote their low cost/low power consumption/small box philosophy.
I just don't see the benefits of any other approach, this is already pretty much the lowest of the low cost per unit wise, power consumption is low, the R& D budget is basically non existent and they don't have to forfeit a bunch of third party support either, everybody wins.
Just look at what ATI's current (well actually > 1 year old) integrated GPU can manage at the sort of resolutions that are common on today's consoles (see 790GX):
It has built in hardware scaling so rendering at 1024x768 will produce very decent results on today's HDTV's. In 3-4 years we should be looking at a 4x increase in performance at the very least, that's quite the leap above Wii.