In the wise words of Alfred: Nevah!

I wouldn't mind buying fewer hardware, but the downside to that is that good luck getting anyone to sell such a console at a "reasonable" cost. You'd be paying a lot for it, or (most likely) having to buy into a cell phone like contract, which is what MS likely wants for the game business. 

I'm just being realistic, how I could see it happening is this:

- MS goes to Sony and says "look, forget about the PS4. You're just going to burn through billions of dollars you don't have trying to compete with us. Scrap it, we'll let you support our platform, we'll give you a fat wad of cash upfront since we can see you need the money, and a yearly cut of all licensing fee revenue. You can contine on as a publisher and advisor as long as it's exclusivly for us."

Now Sony may initially balk at that, but then MS could bust out something like saying they're going to buy the Call of Duty franchise as exclusive (as Activision is up for sale). 

I don't doubt Sony can make a nice PS4. What I think is going to happen, and I'll call this right now, is MS can see Sony is hurting for cash right now. They are going to go hard after third parties to make certain IP exclusive, since both XBox 720/PS4 are starting from 0 anyway, a lot of third parties are hurting nowadays too -- I think you'll see MS cut some massive deals. 

That's just my prediction, but I can see it happening. When MS senses a weakness in a competitior like the weak position Sony is in today, they generally exploit it. That's their MO. 

All successful businesses capitalize on the opportunity presented by the weakness of their competitors. That's just good smart business. The way you speak makes it sound like you think MS is the only one. If the roles were reversed Sony would do the same thing.

I like to imagine a world where a gamer can enjoy all games on one machine. In that world everything works out for the best. Is it realistic, probably not. Is this rumor real, almost certainly not. But a man can dream.

It will make it easier for more people to switch to Nintendo when they already have the MSony machine. 3rd party publishers will make more effort to support both WiiU and MSony this time. Plus this gen has proven that the market is big enough for 3 consoles to sell well. Leaving a spot open for the Applebox is probably not what MS and Sony want.
Isn't that how the ps1 came about with just Sega and Nintendo on the market. Instead of working with Nintendo Sony decided to launch a console themselves. Why would Sony want to work with MS now.

You bring up a lot of great points. I'll discuss them one at a time.

Do people "switch" or do they more often buy two or more? Everyone I know had a Wii and one of the HD Twins. If there was a PlayBox I'd expect them to do the same. The plus for MS and Sony would be that their side of the market wouldn't be split.

Yes, 3rd party devs would port between two more than they would three. But as far as next gen goes I don't see a lot of high end games going to the Wii U after the Sony and MS hit the market. Whether together or separate MS and Sony will have more powerful hardware and devs will probably treat the Wii U like they did the Wii.

Yes the market is big enough for three. But it's possible that MS and Sony are looking at the pie and would rather share the fight for dominance rather than fight for a third each. It's possible. As for an Apple console. If it's going to happen it's going to happen. In my opinion it would actualy be harder for Apple to jump in if one machine dominated than if it was a three way split.

Sony muscled in under some very specific conditions that had little to do with the number of players already in the market. Yes Sony and Nintendo broke up their deal so Sony went alone. Sony secured a lot of big titles and build a simple machine with powerful 3D hardware. Nobody expected 3D to be a big deal, even Sega had planed the Saturn to be a 2D monster and had to tack on 3D as a response to Sony. Sony hit the market fast and forced Sega to go to market without nothing but a few rushed games. By the time Nintendo finally hit the market with the N64 Sega had made so many mistakes that Sony was nearly unstoppable. The same could happen during any generation to generation transition. If a new system hits the market making the old systems look dated people take notice.

"Why would Sony want to work with MS now."

Well I'm not sure they do. But if the rumor is true, it would probably have to do with all the money they lost developing and supporting the PS3. It's possible that neither Sony or MS want to sink the kind of money it would take to launch a new console, with the kind of specs that people expect, just to fight over 1/3 of the market. It's possible that they have looked at their numbers, the market and they have bad forecasts. It's possible that they have looked at their customers and have seen that they are the same kinds of people so instead of fighting over them when they could share. It's possible, however unlikely.

Whatever they do, it's not really new. Remember microsoft-sony.com etc.

Switch is maybe the wrong word, but that's what basically happened with me. My secondary console became the most played over time.
You're right that Wii + HDbox is more common then ps3+360, but by now plenty of people are starting to get the other HD twin as well.

When MS and Sony join it will be closer to a 50/50 split between WiiU and slightly more hd box instead of 3 thirds, MS and Sony will effectively only get a fourth each. Especially with the WiiU having a year headstart this time. And I do think 3rd party developers will not ingnore the WiiU in that case like they did the Wii.

"In my opinion it would actualy be harder for Apple to jump in if one machine dominated than if it was a three way split."
That depends, it was pretty hard for the Xbox to gain ground against the ps2, still it happened and Apple has even more cash to burn.

Apart from that I think both companies are confident they are in a good position to dominate next gen by themselves. Sony has learned from its mistakes and is ready to get back to ps2 greatness. MS is ready to take over the living room and become the preferred set top box, they are ready to go after a much bigger market.

I don't have the confidence that you have in the Wii U. I just don't see it repeating the Wii's sales at all. I expect it to be much more like the Gamecube. The whole Soccer Mom and Grand Parents thing has ended. Those people still have the Wiis and either they are collecting dust or they still use it but don't need anything more than Wii Fit and Wii Sports. MS and Sony will hit the market, together or not, with much more powerfull machines with true next gen technology. I just don't see the Wii U's touch pad pulling people in like the motion control thing did. Nintendo will always be fine because it's the only place to get Mario, Zelda, Metroid, etc. But the big casual fad has ended and I don't see Nintendo reaching half the market. It will probably be only as successful as the Gamecube.