I don't think they're headed in the wrong direction at all. In fact, I feel that they're doing just the opposite. It seems to me that Nintendo is finally realizing that they need to target more than one audience. With the Wii, they made it clear that they were focusing mainly on casuals while still providing entertainment to their loyal customers, though not focusing on them. It was a smart move, because Microsoft and Sony had put all their focus on the more dedicated gaming audience. Nintendo jumped at the opportunity to snag all the non-gamers and casual gamers and convert them to Nintendo customers. It worked surprisingly well.
But now that Sony and Microsoft have also started focusing on the casual and non-gamers, Nintendo has much more competition to worry about. So yes, they need to step up their game and start focusing on the more serious gamers- the people who want nice graphics, more mature games, longer games, better wi-fi, etc. Focusing on the casuals and family-type games isn't going to bring them much more money now that they have more competition where they were once dominating.
Nintendo doesn't
need better graphics or more powerful systems to make great games, but I think we all know they'll make more sales if they start utilizing these things. They've already been relying heavily on 3rd parties for Wii games, but they've been companies like Hasbro and Disney a lot of the time. Maybe equipment with better specs will convince companies like Capcom (just an example) to get more involved with Nintendo. No 3rd party company wants to invest in a console that won't get them any sales.
Personally, I like the idea of them competing a little more because I know they can really blow the competition away if they really want to. Nintendo has innovation other companies just can't match, so pair that up with great technology and the entire gaming industry is going to improve by leaps and bounds.
....of course, this is just my own opinion.
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