Physical controls on the Nintendo DS are a major selling point for kids. If Apple wanted to destroy Nintendo DS they would make a game-version of the iPod Touch with real control buttons, but that would go against the Jobs/Ive aestheic of unibody design.
I was thinking about that too, that Apple could easily make a gamer's iPod Touch and kick ass. Especially, when you consider how piss-poor is the NDS UI and OS (I have not checked the 3DS yet, though).
On the other hand, I'm not sure that physical controls would remain a selling point for long. Kids nowadays are growing with the iOS-type UI and controls (accelerometer, touch...)
I've just purchased Infinity Blade for iPad and it's quite impressive. The touch-based controls still have some quirks but it's really getting there. I've never been a gamer, never owned a console nor thought about getting one, but having iOS devices brought me to play games on them. People like me who are going to buy games for a casual use represent a huge potential market for game makers that they can't reach through specialized consoles, so there's a great possibility that mobile platforms, especially iOS, will quickly become the priority for game developers.