The problem with your logic is your basing a faulty products failure on two other products. The wii had problems going into this generation because it wasn't next gen and had much market confusion. You still have people who buy wii u games for their wii. In terms of software sales, have you not seem the latest npd? They are up.
Uh....
You're basing this on full-gen hardware sales. Considering how fast the Wii went from the hottest thing ever to dead last and forgotten, there are probably a significant number of Wii owners who "upgraded" to a PS3 or 360, and plenty more - of all 3 consoles - who don't still use them.
The industry would only "contract" if the total number of active users were to decline, and that's probably already happened. The PS4/XB1 will probably reverse that trend.
I think using full-gen hardware sales is the best metric to compare against. Unless you can suggest an alternative metric or way to measure defections/upgrades/closet stuffers, I will just compare the only way that I think is fair and consistent across generations.
There's little argument the Wii expanded the market and now those consumers have left the space, so that would be a contraction and that to me is very worrisome. Even if you suppose the hardcore are growing at a steady rate (compared to the explosive Wii-led casual growth last gen) and are a reliable group that will always show up, there's still going to be a very large hole that studios will have to be aware of.
Now I would suppose many of the AAA studios will probably be unaffected-- or perhaps more affected by the increased budget more than the decrease in potential consumers-- but there was a ton of software moved on Wii last gen and we'll see even further contraction in the sub-AAA space. That's really upsetting to me.
Doesn't part of the contract fall on Nintendo's head? And I know you'll say "those games should pick up a different console," but I'm personally wondering if there are any figures of multiple console owners. It seems like that number would at least be several million, and those numbers don't count as a totally of "console gamers". I would optimistically hope for 200million after 8 years.
Also, you have to remember Nintendo will most likely be launching a new system in the middle of this 'generation', and that will count towards the console total. This picture isn't so cut and dry.
I do think it falls on Nintendo's head, yeah, but everyone will feel it.