I'd understand it if you said, "Basically this could allow people who don't have modded xboxes to watch mediai in the living room. The idea that the Wii will ever surpass XBMC in functionality seems so incredibly unlikely that you may as well just call it impossible. The Wii doesn't even support Dolby Digital or DTS for crying out loud, and 480p is the best picture you can get out of it (XBMC upconverts to 1080i). Not to mention that it also can't play DVD movies. And, btw, XBMC WILL play DivX files, as well as practically every other codec known to mankind. You're going to need more than an improved transport method (and good luck with the digital surround sound).
I know you're pulling for Nintendo. So am I. But I think you've got your head in the clouds just now.
No I'm a realist.
Let's be blunt for a sec. People use xbmc to play video rips they got from torrents sitting on their computer on their tv. These torrents use compressed divx formats which don't have surround channels and aren't hi res. At least not more than 480p. The few files that do support surround sound and hi res seldom work right in xbmc because they weren't encoded properly by the poster. So unless you are into encoding everything yourself manually most of the vids you'll be playing are standard def with good old stereo and maybe analog surround.
And up converting to 1080i is like using a vga converter on a nes. Sure it's a vga signal, but the source is still pumping out state-of-the-crap 8bit graphics.
Yes xbmc does a lot more stuff, a lot of really cool stuff actually, but the stuff is essentially useless. I don't think I'm in the minority here when I say I use xbmc to play the movie files off my pc and that's about it.
I can't believe you threw the dvd comment in there. It's 2006, if you don't have a dedicated dvd player at this point then you have more things to worry about than videos on the wii seeing as how your cave doesn't have wifi access.

The xbox plays dvds, but it also sounds like a freight train when it plays em. It's a servicable dvd player at best and this is coming from a m$ fanboy.
And let's not forget that the wii is tiny and light while the xbox is heavy and huge. Don't misunderstand, I LOVE my xbox, but once the flow of games stop for it, it'd be nice to get my shelf back. When the xbox was current gen, it was a lot easier to justify xbmc... you had an xbox in your living room anyway and you used it all the time, why not mod it for emulators and movies? Now that it's last gen it's going to be difficult to justify keeping something the size of a desktop pc in your living room when fairly decent alternatives (such as the 360 wii and ps3) exist.
The only thing the xbox has going for it is it's harddrive. Personally that's a non-issue for me as I stream em from my pc via file share, but it could be an issue on the wii due to the puny 512mb flash drive. So like I said originally, if they can just figure out a better transport system (such as streaming) it could easily replace modded xboxes.
Just a final note, you kind of sound like a sony marketing exec with some of the points you bring up.

Nintendo was correct in their statment that the majority of the US still uses standard def televisions in their homes. My xbox is hooked up to my state of the art 15 years ago 27 inch crt television, complete with rca and coaxial inputs. My surround sound system sports dolby pro logic 5 (not 5.1) analog surround sound, which btw, should work just fine on the wii.
Granted the tv is a little old as it doesn't even have svid, but I would bet with the exception of the size of the tv that is pretty much a standard setup. Most people don't have digital surround sound systems and gigantic hi-def tvs. I'm not saying a good portion don't, I'm just making a point.