> but pretty soon the lawyers found that Nintendo explicitely prohibits use of open source software together with their Wii SDK, and as such it was a big fault from Atari side.
I think it requires an encryption key to sign code (so you can actually run it).
This is prohibited by several open source licenses, notably the GPL v3. Nintendo lawyers probably just got a bit squeamish and decided it wasn't worth the trouble to decide which open source licenses were alright.
Speculation: Wii games are linked against headers and libraries in Nintendo's SDK which the third party is not allowed to redistribute publicly. The GPL is incompatible with linking against libraries that you can't redistribute.
Also, the source code would contain details of Nintendo's API's which they'd rather keep secret.
Why?