As a game developer, I'll tell you honestly that in theory, Nintendo is right. Powerful consoles need huge pipelines. Games for XBox 1 and PS4 take hundreds of people to make, and every time the power goes up, our team sizes scale up accordingly. Game engines don't magically provide content on their own. Marshalling data into memory takes a non-zero amount of time. We need more animations, bigger textures, and more people working on AI, trying to make it seem better. (Spoiler: all AI in games is mainly smoke and mirrors; there's very little 'AI' going on there because it's wholly impractical.)
So making smaller games that play better on more limited consoles is a perfectly reasonable way to go. Indeed, we can see that when it comes to mobile platforms--platforms that are inherently more limited--Nintendo does very well. They've managed to keep that business going even in the face of the smartphone revolution that everyone thought would wipe Nintendo out.
The problem is that for the last couple generations, Nintendo hasn't provided a very compelling experience for developers OR gamers when it comes to their home consoles. A less powerful console is fine, Mario games can be great, Zelda is an excellent IP, etc. But you have to sell enough consoles to make it worth the while of 3rd party devs to come on board, and you have to make good tools for them to make games. I haven't personally worked on the Wii or Wii U, but I haven't heard anything good about those dev environments. (By comparison, I loved working on the PS4 and the XBox 360 before that. The PS3 was a complicated mess, and the XBone had terrible dev tools at the beginning.)
Anyway, the premise itself isn't incorrect, but Nintendo's execution of it hasn't been great. Nintendo should be leveraging its nostalgia value as hard as it can to get consoles out the door. Bundle Mario or Zelda in the box, make old Virtual Console games cheaper, whatever. Just get the consoles out the door. I *personally* think that the Switch looks ideal for me; I want to be able to play on the TV sometimes and in the bedroom sometimes. But if you want to attract the bulk of gamers, you'll need a solid 3rd party effort, and the only way to solve the chicken and egg problem of no games means no sales means no devs means no games is to bootstrap it yourself with your own great IP and marketing power.