I’ve always read hardware to mean the console itself and software to mean the games when it comes to consoles. So I would expect the games to be playable whether they are digital or physical games. I’ve seen nothing to suggest Nintendo want to go the digital only route anytime soon.
I would think if they made the new console w/o physical compatibility people would be weary to get physical for the current gen, knowing it'd only be good for the current gen. But maybe. NES games never played in SNES to my knowledge.
That phrasing caught my eye too; no mention of Switch hardware being playable on the successor. I'm just being overly cautious for now but given how eager Sony and Microsoft seem to be to drop physical games we can't assume cartridges will be supported just because they say that Switch software will be playable.