I doubt such model can work on the console market.
The mobile market is more than big to accomodate yearly offers. Not only that, but people can`t live without a cellphone/tablet (calls, sms, photos, videos, apps, etc.). All consoles "do" is play games. That`s the core business of the gaming market.
If you offer gamers a new console every year or every year and make the games for the new console also available on the old one, you are telling a part of your market that it can wait 2 years before the new model comes. You would always tell a part of your market to hold on. And seeing as that market isn`t that big, you most likely wouldn´t be able to actually profit (mainly because on the investment in R&D for consoles and games).
Again, if the market was as big as the mobile market, it could work. But it isn`t.
About the downscaling idea, i think it will happen, but between the new console and new handheld.
Merging HW and SW divisions just to build a common OS and architecture wouldn`t be taking advantage of everything that operation can bring. To take full advantage it would require Nintendo to streamline production. And that`s exactly what i see Nintendo doing.
They showed that they no longer see consoles as platforms but as means to an end (their new vision for what platform stands for).