A lot of people are perfectly happy with the games that their phones and cheap tablets play, and the Ouya will be capable of handling everything they can. It will be less powerful than the higher end phones and tablets, but most game producers target the larger market so, aside from maybe turning some visual sparkle off on less powerful targets, almost everything should work well enough on the Ouya's design.
I see the Ouya mainly being appealing to gamers who are mostly interested in casual and retro titles, which it is no doubt more than capable of handling. The point is that they are not trying to be a traditional powerful console, they are trying to be what a large group of people (who have traditionally been interested but not interested enough to shell out for a traditional console and its expensive games) are wanting. The fact it also doubles up as a media centre machine, aims to work out of the box (the cheap devices imported from out east are sold as basic Android units with little care for polishing the software install so the user needs a little technical knowlege to get things like XMBC and its ilk to work), and is fairly cheap, makes it quite an attractive package unless you need/want more power (in which case there are better solutions for you out there already).
EDIT: I've just checked and the Ouya runs off the Tegra3 and has 1Gb RAM, so it has oumpf than I thought when writing the above. That is essentially the same chipset choice made for the G1 Nexus 7 so noticeably more powerful than any cheap tablets and phones. It won't match the high power shiny now consoles and play their graphically demanding titles of course, but again I don't think that is the aim and it should be be able to deal with some relatively demanding games (and they'll be very inexpensive compared to the AAA console/PC titles).