The idea of Microsoft and Nintendo joining (on the console front only) to compete against Sony is a very real possibility.
The thought behind it is similar to the joining of forces between Suzuki and Kawasaki Motorcycles. Three years ago, if you stated that they would join forces, you would be laughed out of the building. Now, look what has happened. Neither company standing alone could compete with Honda, and both were floundering in their efforts to gain any significant ground.
A little over a year ago, they joined forces on the Dirtbike/motocross/ATV lines only, and now are gaining significant ground on Honda's line. Joining R&D efforts, offering common lines of product with minor tweaks between them to capture any viable customer, as well as increased marketing and better products has really aided the conglomerate's (so to speak) ability to push forward and capture much more market share in that particular motorcycle niche.
And this talk of M$ is "teh greedy M$$ suxxorzz!!111!" is crap. Basically, all issues would be worked out in the contract negotiations. I can see two differing consoles with each having their own "bells and whistles", but having compatibility between them. Revenue sharing, licensing, etc. would be worked out prior.
Not only that, think about the way the gaming market is going now. Personally, I have both consoles, but for a while, I just had the Xbox. I also have a 6-year old daughter. Now, when I only had one console, the kids' choice for games was crap. Now, had I had a console that could offer me games such as Mario, Pikmin, etc, as well as play Halo, Knights of the Old Republic, etc.... the console choice for the older gamer (in my mind) would be a "no-brainer". Nintendo definitely has a larger software choice for the younger gamer, and is why I finally bought a Cube (also because I wanted ED and Z:WW

).
Anyway, if they joined, that would probably be the only common thread between MS and Nintendo. N would continue to agressively market the Gameboy lineup, and reap the profits it is already recognizing from that product line.
And as far as Nintendo ever joining Sony, forget about it.