Oh, I agree, but I just don't think a 6 inch screen is going to do those traditional console games any favors. The Call of Duty's and GTA's of this world need their screen space and shrinking them down to only 6 inches would make it too hard to see stuff, regardless of resolution. Nintendo would once again be forcing developers to fundamentally change a game in order to appear on its platform and, again, I don't see them making that mistake twice.
Now, a unit next to the TV could act as a traditional console. It would feature the disk drive (if you think Nintendo's going digital distribution only, you're wrong) and handle the processing needed for HD games, making the controller/tablet lighter, cooler and just all around more comfortable to use (and probably easier to design too). Third parties would have the option to simply port a PS3 and 360 game to this machine and be done with it. It could also do BC flawlessly, using your Wii accessories.
But Nintendo's ace in the hole would be the screen on the controller. It could provide some interesting concepts for local multiplayer gaming and, judging by its codename, that's what Nintendo's going for. And if there's the option to use the controller's screen as a primary video output, I could see Nintendo stocking coffee places, bars and fast food restaurants with consoles, so you could bring your controller and play something with others, while you wait for your coffee, beer or burger.