What confuses me, AltogetherAndrews, is the differentiation you make between the previous market composition and the current composition.
The previous market had these compositions. (If you feel I am wrong, please, correct me. : ) )
Hardcore: The guy who bought a game or two (probably more) per month and squeezed the most he could out of his games. Probably did his research before making a purchase, knows a developer or two.
Casual: Bought games based on cover art/name, or hype. Plays a game to get to the end, and just leaves the game/console there till the next time they get another game.
Genre fan: Likes a genre and will check out games, or not look at them, based on their genre. Games range in all sorts of quality, but they focus on a genre or two.
Nintendo is now targeting a new segment. They are bringing the non-gamer, the one who would not look at a game previously and the lapsed gamer, who liked simple games back in the SNES days but quit due to the mounting complexity.
Now, from what I can understand, you make two arguments.
The PS3 can capitalize on the market make up from the previous generation, which is obviously alive and well, still purchasing a great variety of PS2 games. This market makeup is made up of the Hardcore, Casual, and Genre Fan.
Then there's the idea that the Wii is expanding the market, which means that they are targeting the previous market as well as the non-gamer and the lapsed gamer.
Since the market overlaps, that means that, at some level, the Wii is directly competing with the PS3.
If the Wii's userbase grows, more of all these groups will join the userbase and buy the games in greater quantity. Which means more copies sold and happier publishers, which then commission more games.
As you can see, the second argument contradicts the first. Well, of course, there's the audience that goes for HD graphics, which there is. But it seems they are a very vocal but very small minority at the moment. Will they grow? Not in my view. Instead of ravenously seeking HD, the masses will just come to see them as the standard next generation.
Currently, people seem to go for the new gameplay possibilities available by the Wii. Sure, it may be presenting an alternative for current working schemes, but it is a bit more immersive*, and that seems to be enough for this generation.
*(couldn't think of the proper word, sorry)
If I miss understood you, then I'm sorry.