Edit: Ha ha ha, I took so long to reply, three other posts popped up.
The short version:
Sony's reputation won't save it, Nintendo's reputation never saved anything. Also, Nintendo is targeting brand-new markets while Sony and Microsoft target the same old ones. Will it work? DS says "yes". Your comment on the latest GTA release for PSP is a good example: how many people are going to buy a PSP for that game when there was already a GTA on the system last year? That game is preaching to the choir. Last, but not least, power is overrated as a factor in video game popularity. The most powerful system has never won.
The loooooong version:
1. Nintendo needs a more powerful system.
The most obvious counterpoint to this Nintendo's handheld market. Nintendo has practically never had the most powerful handheld (except when no other handhelds were competing) and yet Nintendo always wins. It's easy to attribute this to the particulars of handheld gaming - you need high battery life, fast load times, etc. Nevertheless, the point is that more power does not equal more sales.
And it's true in the home console market too. Amiga, 3DO, 32X, CD-I, Jaguar, Neo-Geo, N64, GameCube, Xbox - the market is littered with powerful products that are all failures in comparison to NES, SNES/Genesis, PS1 and PS2. This is the first time a big company has put a much less powerful console up against other big companies' more powerful systems, but even so all signs say that power does not equal success.
What does equal success? The right games pointed at the right markets. Genesis stole Nintendo marketshare by offering more violent games to Nintendo's growing adolescent audience. Sony stole more marketshare by continuing in the Sega tradition of games aimed at aging players, and also by offering a much more flexible liscencing plan than Nintendo (or Sega). This attracted literally 1000s of third party games.
But now Sony is tightening its grip on third parties. Both Sony and Microsoft have high requirements for the "HD age". Nintendo offers a way out with cheaper development costs, and it is even setting the standard with Wii Sports, a game that looks like it could be done on N64 with a few extra special effects. Wii will see the return of 2D gaming and simpler graphics, and third parties will make games for it in huge quantities just because it's so darn cheap. Ubi Soft has already announced 7 more games for the first third of 2006.
2. Nintendo is for kids
Of course none of this third party support matters if Nintendo is still only for kids right? I'd like to know, how many people here have a parent that regularly plays Xbox or Playstation? If Nintendo is for kids, then Sony and Microsoft are for 10-30 year-old guys - kinda nerdy ones at that. Nintendo is looking to target new markets with products like Wii Sports. To paraphrase Iwata, Pepsi outsold Coke not by competing on the cola market, but by introducing beverages for more health-conscious consumers. And it's working! Just look at the enormous sales of Brain Training and Nintendogs.
Not only that, but just as Sega targeted my own aging teen demographic way back in the day, I think Nintendo is on its way to targeting my own soon to be middle-aged *SHUDDER* demographic with Wii. The system is designed to appeal to moms. And who's the adult in every young household that's nagging about video games? Wii is exercise, Wii is social, Wii is what Microsoft'snt.
I'm not saying Wii will magically make gaming okay in the eyes of moms everywhere. The point is that Nintendo has a chance to target ANYBODY now. Who are Sony and Microsoft going to target besides the same old audiences they targeted last year? Does Gears of War get anybody new playing?
3. Sony is so popular and rich it will eventually come back
Just like Nintendo came back from Genesis? Or from Playstation? My point is, no matter how popular you are in the game industry, you can still fall. Sony's reputation may prevent it from losing completely, but at the very least it's going to fall hard this generation. As for Sony's money...well, the company will have to sell off a lot of assets before it has much money again.
You mentioned that your friends think Wii is fun, but they're hyped for PS3. How many are buying a PS3 right now? How many are saying, "Oh I'll get one when the price drops," or, "I'm waiting for Final Fantasy"? If Wii earns 15 million customers this year, and Xbox 360 gets up to 20 million but PS3 can only manage 8 million, where do you think third parties are going to put their games? Just last week Koei announced two more exclusives from PS3 are being ported to Xbox 360.
Conclusion (sorry this is so long, I love this stuff):
Sony does still have a reputation and that may be enough to prevent PS3 from bombing completely - similar to Super NES. But Sony is facing a lot of challenges - it's fighting a three-front war: PSP vs. DS and PS3 vs. Xbox 360 and (supposedly) PS2 vs. Wii. It's losing on the PSP front, it's losing tons of cash and screwing up terribly on the PS3 front, and I think the PS2 front is laughable - yes the consoles are comparable in some respects and PS2 has a better game lineup, but customers looking for the Wii are looking for a user experience that PS2 simply can't match.