I don't think that Nintendo intends to abandon the hardware market. This seems to be primarily a commentary on the overall sustainability of the game industry (this was supposed to be an analyst meeting). My commentary on the commentary follows.
<span style='color:green'>"We can't be optimistic about the game market," he said, referring to consoles at a meeting with analysts at a Tokyo hotel. "No matter what great product you come up with, people get bored. I feel like a chef cooking for a king who's full."</span>
Iwata seems to be saying that massive growth can't be counted on in the game industry. In terms of western economic thought (which values growth above all else) this is pretty much tantamount to saying "we suck", but Japanese business tends to be built around stability, so if he's talking to Japanese analysts then this is probably not such a bad thing.
<span style='color:green'>"We're reaching the limits of how far we can appeal to consumers by boosting the machine's performance or providing more compelling graphics and sound," Iwata said during the meeting. "For the past few years we've been looking for new ways to surprise people, new ways for them to have fun." </span>
The point of diminishing returns has passed with regard to the current model of game console technology. As a result, frequently investing large amounts of money and resources (as well as harming the viability of the existing product line) in order to develop, launch and support a new console is not a prudent approach for a company like Nintendo, whose primary strength is in software development. Oh, and that they know a thing or two about the game industry.
<span style='color:green'>Iwata also defended the company's policy of maintaining a stockpile of cash rather than investing it in new businesses. "We have 900 billion yen ($7.25 billion), but one of our rivals, Microsoft, has 5 trillion yen," he said. "This is a high-risk business. There may come a time when we would have to make intensive investments."</span>
The meaning of this statement is less clear to me, but I think it implies a longer console lifecycle, saving money in case Nintendo is forced to develop a new console to remain competitive (e.g. if there's a fundamental shift in graphics technology such as feasible good-looking voxel rendering).
<span style='color:green'>"We have a sense of crisis, that price cuts in software could destroy the game industry," he said. "The effort to produce machines with better technology has reached its limit," Iwata said. "If things continue, they may lead to the decline of the entire game industry."</span>
Nothing shocking here - software royalties are Nintendo's bread and butter, and a serious software price war could very well force them to slash their royalty rates.
My overall take-away from this is that Iwata is concerned that the newcomers to the industry are making and/or encouraging a shift toward an unsustainable video game market, and is stating that Nintendo will try to stay away from the price/tech wars that leave both consumers and companies drained due to the large investments that must be made. He seems to be banking on the idea that "Xbox 2" and PS3 will not offer enough of a technological advantage to cause consumers to categorically prefer them to Gamecube. Perhaps the intent is to make Gamecube into the steady and reliable platform in a turbulent market, similar to the role Game Boy has played for the past decade...
