You could take PS2 to PS3 as an example. Sony got massive revenue from PS2 but in developing for PS3 that added up to lots of expenses. Why? Sony tried too put too much too quickly. Some people agreed that PS3 should have waited for one more year to be released (this would have been market share suicide in my opinion) but still time is the factor here.
Everything just advanced too much not just graphical advancement (which takes loads of money to develop) but features too. As other posts have said, you need those shiny hot real-life graphics to even be noticed in this gen (xbox and PS3 mainly of course) but people want more. Technical advancement is too much (AI and physics for hundreds of enemies), everything in a game is too complicated, features like achievements for everything and huge multi-player. Things are just going to cost more and more along with each advancement.
But time is the factor, Sony could have waited until hardware parts are cheaper like game companies could have waited until getting into top-end technologies is cheaper. What if next-gen Xbox has a console that allows for many more features in games and close to real-life graphics- Companies would need to develop for that and the costs might be staggering.
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