Choosing the sensor size is a difficult decision for any camera manufacturer contemplating a compact system camera. There is always the tradeoff between a larger sensor with slower lenses and a smaller sensor needing faster lenses; somewhere must lie an optimal sensor size, the question is where? I don't think that anyone really has an answer to this yet. Perhaps there is no single answer, just as in film days there were multiple formats for different needs.
When this whole 2.7x crop factor was first suggested in the rumorverse it was widely panned, but my first thought was that with some clever lens design it could deliver some small fast zooms that would appeal to a wider audience than pancake primes on larger sensors. The problem with the route that Nikon has chosen is that the cameras and lenses don't seem to be much smaller than m4/3rds and the lenses are no faster...
I think that there are really two different markets here for CSCs, the 'better-than-a-compact' mass market (or should this now be 'better than an iPhone?) and the 'smaller than a DSLR so I can carry it when I don't want my full kit' enthusiast market. None of the current entrants (which is now almost everyone but Canon) really seem to know which market they're serving, so they're just throwing cameras into the market to see what sells. Panasonic m4/3rds bodies have been getting smaller and shedding enthusiast features, whilst Olympus and Sony are splitting the market into ever smaller segments.
All the camera manufacturers are facing the question of what will happen when the future generations of camera phones destroy the bottom segment of the camera market. The '1' system is Nikon's answer, but I'm not sure if they wouldn't have been better off with an APS-C size CSC and cover the lower end of the market with a decent fixed zoom lens camera like the Fuji X10. I think that Nikon's system will gain a following, but I don't thinks it's the killer move that will see them dominate this market like they do with DSLRs (along with Canon of course).
None of this really bodes well for Canon, I think that both of the 'big two' have perhaps left it too late to make a significant impact with CSCs; they'd best hope that all this turns out to be a sideline, like the original Olympus Pen. What can Canon now do? If they'd launched an APS-C CSC with some good lenses at the end of last year/beginning of this year, they may have had more room to stand out. As it is, the NEX7 looks like it will carve out the top end of this market (if Sony get their lens development into gear!), even if Canon launch next year it will look a bit 'me too' and will be two years behind even Sony in lens releases. I don't think that Canon would be welcome in the m4/3rds alliance; maybe they should join forces with Nikon in a 2.7x crop alliance!