ok 1st, considering an R4DS can hold well over 50 games on it, i see no reason that size would be the issue, SSB64 was 16 MB, and FFIII and FFXII are 128 MB. So as far as i can tell, you could have a graphics update and 8 new character and a few stages for any SSB64DS they made, quiet easily, assuming they were willing to take the time.
as for the controls, SMB64DS doesn't have any problem handling with out using the touch screen, it has 6 buttons and a D pad, the touch screen could be used for camera work too.
i've never found a Dpad any harder to use the a Dstick (on the thumbs at least).
dpad for moveing, a/b for attack/special, l/r for shield.
thats all your buttons, you could have X as a smash button (just like attack, but wont jab, and will smash instead of tilt) or have it SHOW THEM YOUR MOVES.
or better yet, have the smash button as X, jump as Y, and touch screen as taunt
quite enough buttons for controls to not matter, games did quite fine with dpads instead of joysticks for many years.
as for screen size, if it shows to be a serious problem, you could do something a bit like when you are close to the edge, and have the close up bubble, and focus on the other 2-3 people if one is on the other side of the stage, or in 2 player match, go split screen when they are too far apart and zoom in closer.
i guess it could be a bit of a problem, but not too much of one.