I'll agree with everyone else: they messed up with their marketing techniques. And they're not likely to become dominated by MS+Sony>Nintendo, but more like Nintendo>Atari... Atari was, quite simply, STOMPED out of the way, as Nintendo became the leading industry in consoles.
That's the big problem right there. Most "gamers" started back in the late 80s and early 90s, by kids of all ages. Generally from 4 (when I got my first NES) all the way to early 20s. Games were so simplistic back then, but they were new and exciting and fresh. As the world developed, so did consoles, and technology and games evolved to be bigger and better.
Sony and Microsoft got in on the game, and they came in with games that'd appeal to the same level Nintendo was appealing to (mid teens to mid 20s). Sony and Microsoft kept evolving, and made games for the more mature gamer, because, quite frankly, the original gamers were maturing themselves. However Nintendo back tracked to an earlier time, and started appealing to the youth audiences instead, and for a few reasons.
Starting off, new generations of gamers have been born... Although, you can't really consider them gamers, but more like spoilted brats who get everything they beg their parents for (as with the extra peripherals, as previously mentioned). That would be the second reason: the "gamers" of today aren't as well mentally developed, and therefore have less of an ability to understand games on the same level of depth as the original gamers.
It might be too pretentious to say that the SNES was the best console ever, like DragonDude said, but I would have to agree with him on it, anyways... All of Nintendo's best games ever were on there, and because of Nintendo's marketing ploys, and.... diplomatic abilities, they lost most of their better developers, and that hurt them... A lot...
Square left them after the SNES, and when the Cube came around, so did Rare. There are others, but why go into it? And what I find most horrible is the current handheld war. Nintendo generally had that market cornered, with a few exceptions (game gear, woot). When I first heard they were going to make their next handheld "dual screen," my jaw almost literally hit the floor. I knew they were screwed right then and there.
Then Sony comes out with the PSP, and the only thing that could possibly be a deciding factor, other than price, is the battery life.
I had more I wanted to say, but it was so late last night when I wanted to post it, I didn't even remember to click "post"....