Can I ask how Nintendo is going to compete with this? A base line iPod Touch is ~180$ and its games are by and far extremely cheap. Also, judging by the reviews those cheap games are a ton of fun. Does Nintendo really think that just tech is going to overcome the value proposition? If so, I think they'll be in for a rude awakening.

First of all, the article is about iPad games, and even without an official retail price for the 3DS, I am sure the iPad will cost much more then a 3DS.
The question is not how can Nintendo games compete with this prices, the question is, how can a publisher work profitable with 0.99$ games? From this 0.99$ Apple gets it's share, so in the end, the publisher earns about 80 cent per game. For developement costs of 5 million dollar, which is not much, when I look at the hardware specs of the iPad, you will have to sell 6.2 million copies to break even.
This doesn't include any kind of marketing, which you will surely have to do, to stand out in the overcrowded Appstore.

Nintendo on the other side has no problem competing with the Appstore, they do it with their software, Mario, Zelda, Metroid, Nintendogs and all the other franchises are well known for their high quality incarnations over the last 25 years. People will buy the 3DS, because they can play these games on it.

The iPhone was released in early 2007, in February 2010, Popcap games announced, that Bejeweled 2 was the first paid App to sell more than 3 million copies. After 3 years, no game sold more than 3 million copies, on the Nintendo DS, introduced in 2004, 19 games have sold more then 3 million copies, 2 of them sold over 20 million copies.

The i-Platform hadn't managed it to produce a platform seller during it's first 3 years.