"1) Nintendo is the Disney of Video Games. Lots of companies make cartoons & there's tons of theme parks, but there's only 1 Disney. It's a seal of quality, of fun, of playability. Nintendo's reputation, and the consumer mindshare is in this."

For many decades, I'll grant you, this would have been an almost perfect analogy. Nintendo's brands, characters, and franchises transcended every console generation and consistently drove critics and audiences crazy with anticipation and delight. Mario was the Mickey Mouse of gaming; he and his fellow characters were licenses to print money.

But key to the analogy is that Nintendo used to push the envelope of game design in the same way that Disney pushed the envelope on the animated narrative (and the musical, and the theme park, and so on). The hardware was important, but it was always somewhat incidental. Mario, Link, Donkey Kong, or Yoshi would have grown stale a long time ago if their successive sequels hadn't completely rethought the very fundamentals of gameplay in their respective genres.

You're correct in stating that Nintendo "never targeted the high-end gamer," but for most of Nintendo's history, such a gamer didn't really exist -- at least not in the console space. The particular effect of Sony's, Microsoft's, and later Apple's entries into the gaming business was to segment the market (intentionally or otherwise). Nintendo's brands still appeal across genres, across age groups, etc., but they've grown increasingly limited in reach, due to the segmentation of the market by hardware and platform.

"they dominate handhelds in a way Microsoft used to dominate the desktop business"

And where is the desktop business now?

A very credible argument could be made that the days of dedicated, handheld gaming devices are numbered. (In fact, a lot of consumers no longer draw distinctions between "handheld gaming" as a distinct genre delineated by specialized hardware, and "handheld gaming" as seen on mobile devices). Indeed, Nintendo's core audience seems to be the very audience most readily cannibalized by mobile-device gaming: primarily, younger gamers without a lot of need for specialized, hardcore hardware.

I'll grant you that there's so many things you can do on a DS (or similar device) that simply can't be done on an iPhone. But these days, the gameplay envelope is increasingly being pushed on the iOS side -- not the DS side. Innovative gameplay is Nintendo's lifeblood, and Nintendo needs to be where the most potential for innovation lies.

"And on top of moving games and systems they have a substantial merchandising business probably second to only Disney."

It may seem that way. But "non-game merchandise" represents a $19.2 million business for Nintendo -- approximately 0.2% of its annual sales in 2012. (Source: http://www.nintendogal.com/2012/04/27/nintendo-releases-fina...)

I agree completely that Nintendo had -- and may still have -- Disney-esque potential in the gaming space. But its long-term horizon is cloudy, and it may need a pivot of some sort. Marco's suggestions may or may not represent the ideal strategy (and indeed, I see many of the same limitations in them that you do). But some serious strategic rethinking is in order.