From a historical standpoint, Nintendo have been a critical force in shaping what gaming has become today. From the Famicon era onwards, Nintendo utilized all of the latest technological advances at their disposal to create top-tier hardware. And using this hardware, create the most innovative games of the 20th century. They were the first to create a discrete hand-held gaming device capable of running story-length, full colour games, and gave a home to unknown series such as Final Fantasy, Super Mario World, Metroid, and many others. It is probably fair to say that Microsoft and Sony owe an awful lot to the early technological and creative advancements of Nintendo.
The decline of Nintendo as far as a genuine innovative force goes, probably came at around the end of the Gamecube's lifespan. For the first time, Nintendo had been fully undone. With the rising popularity of gaming, two monolithic electronic giants had entered the fray. And with them they brought a whole new realm of technological innovation. Whilst retaining its edge on pure game-making innovation, Nintendo was hopelessly behind in terms of hardware specs and data input. So as Sony and Microsoft prepared to launch their state-of-the-art high definition gaming devices, Nintendo was left with few choices. They could stay true to their fans, and the path they had been on for so many years: Releasing consoles to the best of their technological ability whilst focusing on retaining a creative edge over their competitors, leaving Sony and Microsoft competing to see who can rip off Half-Life 2 the best, or they could leave their current market and fanbase behind, and try to create a market elsewhere in gaming. Not content with losing such a large chunk of their main market to Sony and Microsoft, Nintendo opted for the second option.
So now we have the two newest Nintendo consoles: The DS and the Wii. Both behind their competition in hardware specs, but performing surprisingly well as far as sales go. This is not due to innovation, contrary to what every marketing campaign for the two would have you believe. This is down to selling out. This is down to substituting your original audience of gamers for "casual-gamers" or rather, causal-"gamers". The DS and the Wii have been subject to a tidal wave of brain-training games, fitness games, cooking games, and games of other categories utterly unrelated to gaming. The purpose of which is not to please the current fans, but to bring in new ones, who wouldn't care for genuine gaming. The old titles are still there. Super Mario, Zelda etc. But thats all they are: Old titles. Not an ounce of innovation in the games themselves, just a slightly new way to play them.
An innovation is not simply bringing an already existing product (touch-screens, motion sensitive controllers) into the mainstream for the sake of feigning originality. And it isn't about playing old things in new ways. It's about creativity: Sheer ingenuity to create something previously unheard of. And Nintendo obviously aren't in that business anymore. They are in the gimmick business.