I think Nintendo is essentially correct about the hardware issues, and spot-on with the push for game innovation being a bigger priority for THEM. Sony's ultimate goals seem to be in blurring the lines between gaming consoles/handhelds and other consumer electronics, and attracting a wider range of consumers with the added features. Sony is obviously more of a 'techno-worship' kind of company. Nintendo doesn't really have an incentive (or a means) to approach their game business that way, so the strategy of pushing for innovative play over raw technical specs may be the only way to survive. It has it's risks, for sure, but Nintendo trying to "out-Sony" Sony would guarantee dramatic failure.
It's interesting that Nintendo is identifying the next two years as critical to their success...the gap that exists before the planned launches of PS3 and Microsoft's next console. Personally, I agree that alot of the models for gameplay are fairly stale. It's like the film 'The Player', where all the movie ideas that are pitched are described as combinations of successful films that have already been produced...most video games today are exactly like that. If Nintendo can really deliver on their idea of innovative games and gameplay with the DS, they could exploit the large volume of dead-air between now and 2006. The repetitive nature of current game design will only get more dull over the course of two years, so I'm hopeful that there really are some fresh ideas out there!