There are a couple of things they can do to "cut" cost and still make decent graphics.

1) Have better planning in the initial development phase. Big budget, high graphic titles usually have thousands of lost hours in labor costs because one team or another is holding up the process.

2)Stop pushing graphics so much. Much of the cost of games is graphics related from the pointless FMV/Cut scenes to the myriad of textures and models that need to made. Which caused an increase in out sourcing. (which is one of the biggest reason for the lost hours.)

depends on how the developer works, if they try to use the same techniques to make game and just scale it all up only the big guys will survive on consoles. If they develop smart then there will be no problems, just like PC developers do these days.

The biggest publishers will still thrive because they'll have the money and the man power to produce games that show off the technology well. I'm sure that some companies will develop for the systems and not make much off of them, but that's with any system. I think the questions should be if consumers are ready for a new generation and if they will cost more out of the gate than this generations hardware? Also, if game prices increase, then there may be a slow transition into the new generation.

A lot of things can happen next generation.
I think developers are already anticipating difficult times and that`s one of the reasons we are seeing real 3rd party support for Wii U. If 3rd parties do see a market on Wii U they might be willing to make more Nintendo core gamers' games.
That could help expand the market for 3rd parties!

One of the worst things that could happen - and i believe it will - is that with the mobilephone and such market increasing, the casual market might decrease already this gen. It`s only natural that with more offer gamers spread out and either only go with one way of playing or share their time/money between several platforms.
What this could mean is that some developers might see some profits reduced because of that, and therefore having to rethink their strategies.
For example, i`m pretty sure Just Dance provided a lot of funds for Ubisoft to increase budgets and take some risks.

Of course, some profit can be gained by developers if digital downloads are welcomed by gamers. Either in the form of versions of retail games or download-only titles.

Here is an interesting article for all of you to read:
http://www.gamesindustry.biz/articles/2012-04-03-next-gen-consoles-mean-increased-development-costs

It seems the production cost of the next generation games can as much as double, and I think not many developers can afford it.

Ah, more powerful hardware don't mean you HAVE to make better textures, particle-effects, whatever. Even simple looking games can be successful (Bit.Trip). But the dev-costs may increase at the start, but in time some dev-tools will be developed to get the cost-factor more controlled. So that's no real problem. Only game-devs who can't think of another improvement to their games than graphics will suffer.

You would believe the guys who brought us Too Human?

But how much will that take, 1 or 2 years maybe? and how many companies/studios will disappear in that time, maybe 20 or 30?, maybe more?, I think at the end we will have less variety, the developers/producers will take even less risks and that will hurt the industry

SnakeDrake no I don't believe that the industry can possibly shrink to six studios. Stack also predicts a single console industry which I think is illogical from a business stand point. I doubt that the Japanese publishers will cede to the North American ones I am guessing we will lose another two publishers this new generation her in NA and that one of Japan's will likely die as well. I could see the big three publishers here in NA expanding their grip on the industry, but others will always try and for business and political reasons I cannot see the big three allowing these developers to achieve that much control. Nor can I see other publishers just sitting by and allowing the big publishers to go unopposed I am also pretty sure new studios will try to found a new publisher.

But the loss of even one major publisher in this new generation is simply unacceptable!

Europeans already pay nearly $100 for games and Europe is still a huge market for games. I say bring American prices up to what European, Australian and Japanese people pay.