Microsoft and Sony are both in a "battle for your living room" and I can't see either of them not having both streaming video services and Blu-Ray compatibility in the next generation ...
With that said, the Wii's lower development cost environment provided an opportunity for small developers to thrive but publishers devoted them to HD projects that often didn't turn out well or sell that well and the company was forced into bankruptcy. Companies like Factor 5 and Free Radical are perfect examples of this.
Even as this generation ends and we move into the next generation there are opportunities for smaller developers if they choose to take them. By developing games for the 3DS, PSP2 or iPhone they could keep development costs reasonable; and they could probably keep their graphics fairly limited if they target a downloadable content or budget game market.
