Software and price are the main factors as always. More so software than price. But like any system, if the games are there it will do well unless the price is absurd, or the marketing is truly abysmal.

1. Pricing is looking like $400 which is good for a console. Wii U isn't selling for reasons other than price: marketing, identity, competition, software quantity, industry approval. While a PS3 $500/$600 pricing is too much and the economy isn't as good as before, inflation has altered spending power and the market is more than willing to buy ~$500 mobile devices. As long as the value and perception is right the product will sell.

2. Dev costs were estimated to be only a 10% increase this gen, which is amazing because as you mentioned costs have exploded due to great graphics, voice acting, motion cap, etc. Apparently the majority of the costs are non graphic related and next gen is going to be easier to develop for so graphics cost aren't a huge deal anymore. That and it seems eliminating obstacles for developing games will make it cheaper, especially for smaller studios.

The major obstacle PS4 is facing is called PS3.
Most PS3 users are late adopters due to initial high price. This will hurt PS4 more than most think imo.

I also believe this is true. So far unless you are a big fan of Killzone and Infamous (basically the Sony fanbase), there's no reason for PS3 users to make the jump yet, especially since a lot of games seemed to be cross gen tittles atm (CoD, AC, etc).

However, if Sony (and MS for that matter) manage to get a CoD exclusivity on their new consoles (highly doubt it because the moneyhat needs to be insanely huge) then this will not be a problem.

Sony as a hardware manufacturer has many advantages when it comes to cost. They can build their consoles significantly cheaper than Microsoft and Nintendo who are mainly software companies. So the PS4 won't be any more expensive than 399 $. I wouldn't even be surprised by a 299 $ price tag, Sony is really aggressive these days.

About developing costs: They will even go down. X86 and unified RAM will make it a lot easier to make games for the machine. Also, ports of PC games will be done in no time. It is a whole different beast than the PS3. The console is very well thought through and I don't thing the developing costs will be an issue. Also, most software companies went bankrupt because they released bad games. If something like Demon's Souls can make a profit, virtually every game can. But bad games won't sell, even without piracy and second hand market, that simple fact won't change.

Call me a fanboy, but I'm pretty sure PS4 will dominate and we will see Gen 6 all over again. Sony is throwing everything they have at the PS4. It's all or nothing this time.

The thing is expectation of next gen is that you will not only get a graphics boost but you will get a content boost.  This is the reason that development cost goes up because trying to fill the world with unique assets takes time.  Longer development means higher cost.  Reduce longer development by highering more people increase cost.

As stated on this site many times people are expecting to see their game world increase , with higher order or content, AI, Physics, interaction with that environment.  So just isolating the texturs is not looking at the bigger picture.

As for the pricing of the PS4, I just cannot see Sony absorbing to much on the cost.  Its not like Sony can bleed money until the PS4 starts to make a profit, I believe the console will come out with Sony take a 50 dollar hit where 2 first party games should be able to stem the loss.  The cheapest I see the PS4 selling is 400 - 500.  If Nintendo was taking a lost with the WiiU at a price 349, I just cannot see the PS4 not taking a hit at 400.  Actually Sony probably will be taking a hit at 500.  It will be interesting if Sony goes for broke and take 100 dollar or more hit if they believe they can outpace the nextbox.

People seemed fairly happy with the massive drop in content from 25-30 hours for a blockbuster PS2 gen game to 10-15 hours for a blockbuster PS3 game. I would imagine most PS4 games are going to stay in the 10-20 range, which should keep costs down.

As for A.I., that progresses so slowly each generation that it seems to not progress at all. Devs would generally reuse A.I. code from previous similar games, with just slight tweaks, A.I. costs are not that high, and I doubt they will increase.

You are right that a game like GT, GTA or any other open world game will cost a lot more, but most will be fine.

As for cost, it's been stimated that the cost to Sony for parts and manufacturing, including their bulk discount and price drops between now and Nov but not including shiping, retailer's cut or sales taxes, will be $540 . I think the most likely cost of the PS4 will be exactly the same as the PS3, $499 and $599. They'll be taking a small loss for each console sold, but enough that they will make profit from the console if the owner buys a 2nd controller and 1-2 1st party games, or 2-4 3rd party.

doesnt stop it from dominating everything. mark my words, the vita will sell more than condoms this coming gen