I believe that they did "lose their magic," or more precisely, had real trouble innovating. Mario Sunshine resorted to a water pack to change it's basically identical gameplay. Wind Waker drastically changed the setting, but things like the unsatisfactory conduction aspect and unfulfilled sailing and sidequest elements of the game show that they were having difficulty coming up with exciting game prospects at the basic design level.
Even look at their other franchises: Mario Kart is basically the same, perhaps even worse, with it's only major gameplay change the not-so-consequential driver-passenger aspect. Star Fox they actually farmed out because they probably didn't have any ideas on how to change the series at all. Donkey Kong actually got innovative, but only 3 years in and by resorting to a simpler, throw-back arcade sensibility.
I truly believe that Nintendo, internally, was struggling not just under the pressure to release games earlier, but also the inability of internal teams to come up with new concepts. I have a personal theory that ties this into the Wii and DS: these innovative control hardware solutions have actually revitalized Nintendo's creative capacities in that they are given new ground to break, new challenges to overcome and new limitations to work around.
In fact, we can trace Wii Sport's and the Wii's design sensibilities back to the DS and Brain Age. Brain Age shows that simple can sell, as long as that simple is maddeningly intuitive (using the DS' touch screen) and addictive on a simple and small scale. Just like all you do with Brain Age is talk, or write numbers, all you do in Wii Sports is swing in a number of different contexts. Brain Age and Wii Sports, both amazingly ground-breaking pieces of innovative software, both benefitted from new input type platforms in ways that neither Mario Sunshine nor Wind Waker could.
In this sense, one can say that the Wii is a lot like the N64. Both systems are introducing brand new input concepts that change the player's relationship to the game and thus make old experiences feel new again.
The N64 was host to an explosion of innovation within Nintendo due to its new input system: rumble technology, 3D control, 3D cameras, Z-targetting, Party Software, e-card based game micro sales, handheld-connectivity, and Animal Crossing's social gaming, micro-items, and customizable avatar creation.
What innovations did the GC inspire from Nintendo? ... Pikmin's multiple character group indirect control gameplay, game specific controllers (Donkey Konga, Jungle Beat, Odama, Mario Party 7), and maybe multiple screen simultaneous gaming are the only things that come to mind.
But unlike the GC, the Wii introduces new input philosophies that will, I hope, inspire the innovation from Nintendo that I remember so well from the N64 era and saw so little of in the GC era.
So, in conclusion, I DEFINITELY see Nintendo as having had trouble creting magic, i.e. innovation, with the GC and this now being possibly rectified with the Wii (as my bit about Wii Sports illustrates).
~Carmine M. Red
Kairon@aol.com