I think the point is that *Nintendo* doesn't need that power, but third parties think that they do. The challenge for Nintendo is to pitch the system's capabilities - and third-party acceptance - at a point where it *dictates* the power demands for the next generation. It won't matter if the PS4 can render Toy Story in real time if all the games are going to be upports from Nintendo's system. The PS2 pretty much dictated what the majority of third parties were building to last generation, even though the GC and Xbox were more powerful; similarly, the 360 is dictating the pace for this one, despite the PS3 having more potential. If the next Nintendo system can fill that role in the upcoming generation, they're laughing no matter what the other two do.
If Nintendo's system is too weak, it'll get upports from the PS3 and 360, but when the followups to those come out, it'll look weak, and be left in the dust. If it's too powerful, it'll be priced out of the market. One possibility - although it goes heavily against what Nintendo have done in the past - would be to sell the system *far* below cost to make, to compete on price from the outset while having the power - but that's so against their usual MO, it feels unlikely.
One other factor is that it might be rash to assume that Sony and Microsoft are going to go for big leaps, too. I think Sony, in particular, are very aware that the amount of tech in the PS3 meant that it was priced way too high for the first few years; a suitably large generational leap over the PS3 could result in similar costs, and they may not be able to rationalise that (or was it *just* the blu-ray drive? I doubt it, somewhat). Microsoft are a bit more comfortable with having space to develop into, but Kinect is more expensive than Move, so Xbox owners may have a bit of a "What, a several hundred dollar upgrade *again*? I did one just a few years ago" sticker-shock type moment.
I didn't grab a Gamecube till a bit later on.
