What is the hardware upgrade that should have been done by the entire industry?
I'm not an expert on hardware, but we can start with no HD. Think of this way, if Sony replaced the Blu Ray drive with a regular DVD drive, they still would have taken a loss on a $600 console. Hardware at $300 breaking even or taking a small loss is probably where we should have been in 2006.
Even if you feel Nintendo couldn't afford to match the other guys, that has nothing to do with the Gamecube. The Gamecube didn't fail because Nintendo couldn't compete with conventional specs, particularly since they still made a profit on it so it wasn't some spending race like you suggest this last generation would have been.
How are you still not getting this? First, Gamecube's failings are primarily the result of 15+ years (at the time) of straight-up douchebaggery. If Nintendo wasn't so hard-assed back in the day, they would have flat-out fucking destroyed Sony. There would have been no reason for third-parties to migrate. Yes, some of it was needed when the industry was recovering from the crash, but Nintendo just kept pushing and pushing. Have you read about some of the **** they did? Once third parties had a viable and powerful enough alternative, they bolted. Rightfully so. No one wants to be friends with a bully.
Second, Wii was necessary
BECAUSE of those past failings. They couldn't just offer a spec bump and another "Sorry, we were assholes for so long" card. It was too late for that. If Sony released Gamecube with all of its oddball choices, third parties would have dealt with it. The problem wasn't really Gamecube. The problem was that third parties just didn't want to deal with Nintendo. Why would they? Sony was market leader and Microsoft threw money at them. Where does Nintendo fit in there? One is a much better friend and another is trying to buy your friendship. Nintendo had to try something else. They had to find another way to reach consumers in a crowded market where their competitors were largely offering the same thing along with convincing third parties to make games for it. And it almost worked and I think it would have if third parties didn't have to devote so many resources to HD development. It's easy to say it didn't work in 2013, but it wasn't a bad strategy in 2006.
Third, no one is saying that Nintendo didn't gimp out on Wii hardware. You keep bringing that up like it's this really important thing and it would have been had Sony and Microsoft NOT forced the HD era. Even if Nintendo made the expected hardware jump, they would have been outclassed. If Nintendo jumped into the HD era along with Sony and Microsoft, they would be in a lot of trouble financially today. Maybe less so than Sony and Microsoft if Wii still became an international megahit. Now, if all three hardware manufacturers made that expected non-HD jump, Nintendo probably would have come out looking golden. They would have their Blue Ocean AND core gamers because third parties would just port games over, not wanting to miss out on the Wii boat.
Plus if it was unsustainable how did all the companies that survived make it?
Is this a serious question? Holy shitsnacks, man: SONY AND MICROSOFT ARE SEVERAL TIMES LARGER THAN NINTENDO AND THEY HAVE OTHER REVENUE STREAMS. PS3/360 look really super successful until you realize how much money Sony and Microsoft lost. Seriously, look at their videogame divisions and compare them to Nintendo. Yes, Nintendo crawled through 2012. No one is denying that. However, Wii was very successful for them and if Nintendo launched Wii U level hardware in 2006, there is no Nintendo today. That's the difference here. You may not like what Nintendo is making these days, but you don't matter. No offense. I'd rather there be a Nintendo today than a Nintendo that tried to sell a $600 console, failed, and was forced to sell off all their assets and close down.