There is logic behind why they never go for the best hardware. Remember back when the 360 and PS3 we're new they both had hardware failures at launch what we now refer to as RROD and YLOD. Nintendo used older hardware that had been revised and improved so they had less issues. They make more money by selling cheaper hardware at a price point and on top of that they don't have to hire as many repair workers. So ultimately they win. It's kind of scheme really, but it works and the public just eats it up. How do they know it's gonna be hit they do tests on the public by releasing things to see how the public will accept. The DSi for example was really just a test to see how the public would like DLC on a handheld. It was well received so they went ahead with plans for the 3DS. The Wii in that sense is a test to see how well the public would have accepted motion controls. Obviously it was a success much bigger than they thought it would be. The Wii U will undoubtedly be a success.
Just FYI I'm pretty sure the rate for YLoD in PS3s was/is like less than 1%. Like I thought it was .7%. Xbox 360's had much larger RRoD numbers but it's been fixed for a while now, from Jasper original Xbox models and for all Slim models as well I thought. I definitely wouldn't say hardware failure was what kept them out of the market, they just realized for what their target audience was, they didn't need good graphics to appeal to them.
I definitely wouldn't say they "ultimately won". It was a definite trade off, having a cheaper console with lesser graphics. They lost a shit ton of multiplats, excellent multiplats at that. They got some but they were usually downgraded ports that definitely couldn't hold a candle to their HD big brothers. Plus graphics are definitely a selling point of a console. When I buy something new I'd like the graphics to look new, buying a new console and having games look like they did ten years ago is ridiculous when tech exists to make them look so much better. Let's not forget that more power equates to advantages like farther render distances, less lag when shit starts flying, and more objects on screen. Pretty much any modern open world game would only be a shell of itself on last gen tech, not to mention games that are incredibly intensive on the "objects on screen" part like Dead Rising. I'm sure everyone remembers the mockery of Chop Till You Drop.
Yes, their cheaper console won them over in sales but it definitely didn't please fans as much as the Gamecube did. While the Gamecube sold poorly many fans will still argue about how great the library was in general, from first parties to third parties (including multiplats).