I think the courses should include theory and practice. The theory provides a very broad (general) imagination space out of which one may deduce to specifics. You need to know the better of those elements, well. Of course, most folks (including me) actually need to do specific things to make the theoretical ideas much, much clearer. So it's important to do hands-on labs. Most of all, though, a good teacher is needed. Otherwise the theory isn't alive, it's just some dry stuff you just don't understand much about and the labs just seem disconnected and possibly random and teach very little, really. Except that you need to do them to get credit.
I think the OP was talking about graduate level stuff. Hopefully, such a student would be able to write down how to make an LED flash in five minutes or less on a piece of paper. But your point is well taken. I think that setting down to do real work teaches like little else can. So this is why I recommended something along the lines of having to write a compiler, a linker, and an operating system. All of them. Should be doable. In school here, 3rd and 4th year included compiler writing courses. Operating systems was 3rd year. Writing one would be 4th, I suspect. So pulling all this together should be possible.
I'll give you an example from my own experience. I wrote a symbolic assembler and segmented linker over a weekend. Started work on it on Saturday morning, finished up both pieces by late Sunday night. It's not that hard to do. In a recent project, in 2005, I wrote an operating system from scratch (I had been flown onsite and was literally sleeping under the desk they gave me) in less than two days
-- and didn't change a line of it in the many months afterwards. It was thread-based, supported exception handling per process/thread, and had several methods of inter-process communications, as well as preemption, a precise sleep queue, and semaphore queues.
These things don't need to take a lot of time.
Completely agree. There is nothing like sizzle, smoke, explosions, sparks, light, and action to motivate folks to learn how to make it happen well.
Jon