>>It would be like having a remote controlled car, except you can't watch the real car you have to watch it on a TV. And you can't take it outside because it can only play in the area captured by the camera.<<
I think you're limiting your imagination to what was shown on the demonstration. As I've already said, this was not a Nintendo demonstration, but rather from a company that does not specialize in gameplay. Whatever system they have set up is not optimized for games. The way you package the technology is as important as the technology itself. I mean, there really was a fine line between an NES and a PC back when. PC's had more power than an NES, but the NES was built with gaming in mind. Its video card was optized for graphics, its media was optimized for transportation and some wear and tear, and its input devices were simplified for ease of use. PC's could always make more powerful games, but that wasn't alwaya the point. I'm sure if Nintendo were to use such technology as this Augmented Reality, they would adapt it in a similar fashion.
Your criticism of a static screen is probably true. That probably would make for awkward gaming. But this technology isn't limited to static screens. We've already mentioned the potential for portable devices to be used as "windows" on a virtual world. I think that is more practical- and I'll bet we see that in some point in time, whether it's from Nintendo or not.
What amazed me was that the technology was out there to have cg worlds interact with the real ones in such a way. I didn't realise that motion tracking was nearly as sophisticated as that. I was blown away by the fact that the car could be affected by the force of the actual-world mechanized door, for instance. I know you don't think so, but I think this could have some interesting applications in the hands of creative people. To say that this would be limited to something of a "remote control car" is far from true. Remote control cars can't shoot, transform (in a drastic way, at least), fly, or cast magic spells. They can't disappear, reappear, or run off a table without being damaged. Don't forget about actually introducing characters. But who knows. My point was never about this specific technology anyway, but rather that new ways to interact with games are out there other than a simple gyroscopic controller.
My other point, though, which has not been taken up yet, is that no matter whether computational horsepower is enough for gamers or not, it is not a strategy that Nintendo can survive by right now. Chances are that Nintendo could not best Sony and Microsoft in the horsepower game. For one thing, Sony has the Cell chip which seems to be the strongest thing out there right now. Nintendo could incorporate this as well, I guess, but seeing that Sony was one of the developers, I have a feeling the deck is stacked against them. If Nintendo simply matched the power of their competitors' systems, that would not be enough to lure back developers and gamers. That would simply re-create the position they were in for the Gamecube.
Obviously this is Nintendo's philosophy for the system- they've said so themselves. They said that their new system will be more powerful than the Gamecube, but they have purposely downplayed horsepower. Instead, they have said that they are not trying to compete with Sony and Microsoft any longer, but rather expand the market in a new direction. And I expect that they will try to do just that. They need to pull off a "Holy S***!!!" moment to keep from slipping further.