What experience can we offer with the technology available for a reasonable price? That's a generation. 8-bit consoles, portables, etc.
Technology advances enough and a new experience is possible. Companies ask the question again. "With the technology available now, what can we offer consumers for a reasonable price?" Boom. 16-bit consoles. Neo Geos. Jaguar 64-bit disasters.
What's possible changes. Devs ask the question again. Real 32-bit and 64-bit consoles arrive.
It changes again. We get DVD based consoles (or in the Dreamcast's case, the GD Rom). Portable consoles advance. Mass market hardware reaches a point where it can pretty much create what devs think a "modern experience" should be.
Time passes. The old tech starts showing its age. Better tech is available for a reasonable price. We get PSPs, DSs, PS3s, Xbox 360s. Motion controls that actually work. New generation.
When new experiences are possible that the old hardware can't accomplish no matter how hard you push it, a new generation begins. Hardware is the canvas that devs use to create their visions.
And, of course, different sacrifices are made each gen to compete. Want power, you gotta sacrifice price. Want the low price, you gotta sacrifice some functionality. Technology isn't ready yet? Be prepared to only sell to the hardcore. Want power AND price? You're probably gonna have to sell at a loss.
Whatever can be improved upon drives the gen. Higher resolution? No loading times? A new type of online connectivity? Innovative new controls? New generation. It's the circle of life.
(Forgive me for rambling. I'm at work. I can't proofread this thing.)
