Nintendo went with the Wii's choice in design consciously. They knew it would be useless to compete head-on with Sony (and Microsoft, to a lesser degree) in specs, so they went for cheap and widely available. It worked, although the third parties pushing ultra-expensive cinematic experiences didn't bite.
An optimal environment would be Nintendo's first-party combined with Sony's third-party community, which includes both Eastern and Western developers, but I think in order to get the benefit of such a pairing, it would have to be on Nintendo's terms rather than Sony's terms. An unintended consequence of Nintendo going third party, at least from the standpoint of gamers lusting after Nintendo's catalogue without having to buy the hardware to play it on, would be the inevitable narrowing of Nintendo's focus down to one or two cash-cow franchises that would occur. Much like Sega of today is pretty much all about Sonic, Football Manager, and Total War these days, with almost all of its other franchises on indefinite hiatus or stuck in Japan, Nintendo would be pretty much nothing but Mario and Pokemon. Almost every third party developer nowadays trades on a small handful of successful cash-cow properties, with anything that isn't a blockbuster abandoned by the wayside. Even EA pretty much runs on annual Battlefield, FIFA, and Madden anymore.
On a related note, I know a lot of analysts are really pushing for Nintendo to move into the Android/iOS space, but I don't think Nintendo would be very successful in that space. The economics of the mobile market would set Nintendo up to fail. Freemium and 99-cent games have created a race to the bottom in the mobile space. Mobile players piss and moan if the price goes up any more than that. The market rewards them with games that are accordingly low in production values and design that are little more than blantant cashgrabs. The mobile space may be a far bigger ocean than the hardcore space, but flood any ocean, no matter how big it is, with shit, and nothing but parasites can survive in there.
I did see some of the games of that era, like Unreal and Quake. On a technical level, they looked whizzy. On an artistic level, they didn't click with me, but I freely admit to personal bias in that respect. Regardless, they didn't entice me to invest money in upgrading my computer to handle them.
Economics are probably the biggest restraint in gaming these days. I suppose that's always been true, but even back in the late 90s-early 2000s it was still easy enough for even mid-level developers to do well. It's why so many game developers are retreating to the mobile ghetto, because it's dirt-cheap to make games there. Even there, it's tough to make a living unless you create the latest swipe-and-tap IAP-driven fad game.
I looked at Papers Please! after I read your comment. That's the kind of stuff I'm talking about. That game looks interesting. For my part, one game I do want to pick up on Steam other than Legend of Heroes is Tesla Effect, which is the latest Tex Murphy adventure game. Tex creators Chris Jones and Aaron Conner bought the Tex Murphy license back from Take-Two, which was the last owner of Access/Indie Built before they shut it down, got a successful Kickstarter, and a deal with Atlus to publish it through Steam. So that's on my to-buy list. I've also thought about downloading the Leisure Suit Larry remake, just for chuckles.