I think everyone is aware that the video game market is growing -- that doesn't seem to be in question. However, I think many people take this knowledge without full analysis, and simply assume that this growth is somehow divided evenly amongst all genres and market cross sections, and when one thinks about it, that very clearly shouldn't be the case. Some markets are growing faster than others, and still other markets are even shrinking. As an analogy, the average height in the United States has increased several inches in the last 50 years; this does not mean that every single person living now is exactly 3 inches taller than people living in the 40s. Some people are even shorter than the average height was then, but as a whole we have gotten taller.

I have lots of specific examples to give, and lots of analysis to give about what it means; I just want to start with this individual point of discussion, and move on from there.  

Of course the video game business is growing, thanks to Nintendo.

Good point bodhesatva, and very true.
The handheld market has exploded, and we all know that the home console market is also on the rise. We also know that that rise is far from evenly distributed.
The software sales are what's really tagging bigger numbers to the industry as of late, never have so many games been purchased.
The level of accessories and extras to your home console has also drastically grown, as have (naturally) the sales of such items, probably owed almost in full to Nintendo for now.

I dont know how its growing, until 1 system passes ps2 sales I dont think video game market is expanding at all.

Good examples, Mummel. There really are a bunch of ways to break this down.

For example, we could divide it geographically: in Japan, for example, the "hardcore" market (largely defined by jRPGs) has either been stagnant or even in decline for the last decade.

Another example would be Fighting Games -- blockbuster series like Tekken, which sold 4-6 million in the early 90s, are now struggling to crack 2 million. Street Fighter III sold profoundly less well than SF II did. Soul Calibur III did less than half its predecessor.

An example of relative stagnation would be football games; the Madden-head crowd doesn't seem to have grown for 5 years now. We see some jumps and dips in sales from year to year (this year is down, but I wouldn't be surprised if next year we saw a jump back up, due to random fluctuation) but overall Madden has been selling 5-7 million with consistency for a while now.

RPGs in general also seem to be stagnating in sales; Final Fantasy is down slightly worldwide, noticably so since the release of Final Fantasy VII. Suikoden has been selling 200k-300k for a decade. Dragon Quest is up slightly, but still has never gained traction anywhere but Japan. Overall, virtually no growth in the genre for some time now.

Some "hardcore" markets are up, though; I think it's fair to say, without any analysis in here, that the FPS market has grown dramatically on consoles over the last 5 years. One might even apply this more broadly to shooters. 

Can't just see one system sold units, add all consoles sells from last gen and compare that to the end of this gen sells and see if its more then last.

Wii sells is gonna be way more then gamecube's, xbox360 sells is gonna be more then xbox surely, ps3 sells has little chance of comparing to ps2 sells. So overall this gen of consoles has a good chance of surpassing last gen consoles in sells.

WW the market is growing, either at the end of this gen and or next-gen the U.S. will not be the main market anymore.

WW from launch the 360 and the Wii have both Shipped more consoles than the PS2 did its first year.

In each individual market the Wii has exceeded the PS2 when launches are alligned for all markets. it also has exceeded the PS2 in terms of sales by a significant amount(ie more than double)

The DS is well ahead fo the PS2 in both WW and regional sales at this point

The DS has surpassed the Game Boy, Game Boy advance, and PS2 in Japan for total LTD sales in that region.

The Wii and 360 have both passed the japanese LTD of both their predecessors. Wii has Surpassed the GCs life to date sales in Japan.

The 360 is on track to beat the original XBOX and the PS3 is following a similiar path.

Um, in less than half the time, DS is just about to over take the 7+ year install base of the PS2. This fact alone makes it impossible to refute that the video game market is rapidly expanding.

and I thought there was an article about the Wii's instal base overtaking the PS2, was that just projected or what? 

Each successive generation experiences market growth. No generation yet had ever deviated from this formula. And although the growth rate in established markets (US, Japan) may slow down, new markets will continue to open up.

Using anecdotal evidence to support your theories about waning genres leads to false conclusions though. For instance, Street Fighter 2 was a massive cultural phenomenon because it revolutionised the fighting genre by allowing players to select a range of characters with their own distinct set of moves; by the time SF3 came out, far superior games such as Virtua Fighter and Tekken had arrived on the scene and the 2D fighter was dead.

Soul Caliber 3 sold worse than it's predecessor because it wasn't as good, and people who'd already bought SC2 had no reason to buy another fighter that was nearly identical. The second release of a particular franchise on any given platform almost always sells less than the first (taking the PS2 as an example: MGS2>MGS3, GT3>GT4, FFX>FFX-2)

The key issue to bear in mind is that, as the market grows, so too does the competition. The bigger the pie, the more people that want a piece.