Won't be niche for long although I don't think because of Android. The Surface x86 tablets have 360 controller support standard, hdmi out standard, and with x86 hardware and ~360 level of graphics means an enormous back library of x86 games can be tweaked to also work with touch along with the standard keyboard that already comes with it with minimal effort. With millions (over time) already owning these Surface tablets means it won't be a niche form of gaming for much longer, especially once prices inevitably drop. If they allow one app purchase on the app store to let that app work on your pc, laptop and Surface x86 devices then that will help adoption even more. It may be niche today but I don't think it will be that long before it becomes mainstream.
So we agree that right now there are a lot of games that need traditional physical controls and a lot of gamers that want to play these games with these kinds of controls. Personally I don't even want to play JRPGs with a touchscreen over a controller, but I digress on that point.
What you're describing is a scenario where tablets with HDMI out and XBox controllers replace consoles. The thread is about them replacing handhelds. Carrying a tablet and controller around with you is not the same as carrying a handheld gaming device. You can't pull the tablet and controller out of your pocket and start playing it on the bus or between classes or whatever (one of Nintendo's major handheld market is children). Even during long car and plane trips it'd be a pain because you have to set the thing up somewhere while you hold the controller. Laying it on your lap would be uncomfortable to look at.
So you're back to replacing consoles. Sure, this can work for some people. Surface isn't going to have XBox 360 level graphics but it'll be able to do a lot of home games. Of course you're looking at new tablet hardware vs really old console hardware. The console hardware is the best we've got now but will be replaced eventually. Then you'll get a much bigger advantage with them. It's inevitable, you can't really fight a 100-200W+ power budget with a < 10W one.
Tablets sit between handhelds and home TV devices and computers.. they have some advantages of all of them but they can't really displace everything on their own.