Sorry to bump this old one up, but I had a minor revelation. Widescreen would affect the physics of the magnifying glass is some weird manner. Even if the damage effect of the magnifying glass is removed, the lower likelihood of getting in it when being sent horizontally would be another complicating factor, like when getting edgeguarded in the bubble.
Most if not all of the "problems" encountered with the damage indicators obscuring characters can simply be fixed with better camera work, or changing the position of the damage indicators. Widescreen actually won't help much at all, since in Melee, the characters become obscured by the damage indicators when the camera is trying to focus on multiple ojbects that are spread on different *vertical* levels. Thus, the addition of widescreen support won't help that issue nearly as much as you're expecting it to.
Widescreen movies on non-widescreen televisions are possible by letterboxing, yes. However, since most 4:3 TVs are CRTs, this is actually bad for the TV, as the bars cause burn-in. It's why letterbox DVDs are not recommended for use with CRTs, and why video games in general never use such a widescreen format.
It's possible to letterbox an anamorphic widescreen image if your TV has such an option to, but the bars will simply be unused space, and this will also reduce the vertical resolution of the image, causing loss of detail. And we're already limited to standard-definition as it is.
Would I want widescreen support for home/friendly applications? Sure. Would I want to see it being used in the tournament environment? No, because I feel it would overcomplicate matters. That and anamorphic widescreen doesn't really look that great to begin with.