I think it absolutely cannibalizes sales. It made sense during the holidays because Nintendo had nothing new to offer its customers. The NESC was a last ditch product to try and make some revenue until the Switch launched this year.
I very much believe in their minds they do see the mini as hurting VC sales, and if the VC was worth a damn, it may. I 100% believe "N" would sale all digital all the time if they could, as that is all profits all the time, where physical requires so many more moving parts that cut in to profits at the end of their day.
They never release games on the Virtual Console though. They have no idea what they're doing.
Considering how void the NS release schedule is for most of the year, the VC should have been their main focus past Zelda to provide games for their new system, but they really have no clue when it comes almost anything. SNK is selling old NeoGeo games to people who are desperate for cheap fun games to play, and "N" is nowhere to be found(what a surprise). You release a system with almost no support, you have a rich history of 30+ years of games, and none are anywhere to be found at launch? More funds left on the table, where now your selling an all in one device that gives fans 30 games, or hundreds if they are so inclined to do so, and the machine that you need to have succeed is left with nothing? Yeah, I agree they are beyond clueless.
They're completely different markets. There is very little overlap between the buyers who will pay several hundred dollars for a Switch and then $5-10 per classic title and the buyers who would have dropped $60 on impulse, or as a gift, during the holidays. Keeping the Classic line gives them two different revenue streams; dropping it would only eliminate their presence in the "toy" market entirely.
I said the same thing yesterday, as I don't think the bulk of those people buying a mini, give much thought or care to the NS. My wife grew up with the NES, and it was her families first gaming system. During the holidays she loved to sit and play some of the games she grew up with on the mini. As for the NS, if not for my son bringing it up every 5 minutes(because he wants one), she would have no clue what it is, or why she should want one, it's just not a factor. The mini she may have bought for a trip down memory lane, while the NS has nothing she cares about.
For them to stop the mini, is cutting off a cash flow, they probably won't get once it's gone, as those markets are very different. Just from a price point, their is a huge void between the two, and a $60 device is never going to sale in the same market as a $300 one, it's just not. Those same fanboys who are willing to give "N" the same funds again and again for the same games across many devices are the NS crowd. Those people who want some classic games, and don't want to buy games over and over for different gaming systems are the mini market.
I don't believe they will keep both going, as I do believe they don't want the mini around long term, but that would be just another bad choice in an already rather long line of bad choices, so nothing new to see here. Just more of the "N" norm.