As S.T.A.G.E already said, it really isn't about how much Microsoft can afford to lose it is about what Microsoft can justify to lose ...

Microsoft lost roughly $4 Billion on the first XBox, (IIRC) lost an additional $4 Billion in the first few years of the XBox 360's life, and the home and entertainment division had several high profile failures (like the Zune). From what I recall, investors were not happy and Microsoft pacified these investors by claiming large losses were over for the division.

While I have no doubt that Microsoft may take losses on their next console, I think it will be a much more modest loss than it was with the XBox or XBox 360; if I were to guess I would say they would be willing to lose $50 to $100 per console.

Your argument falls flat with the good old, people like working with what they know. Ever see an old person with a computer. How about your parents? Do they use all this new technology that's coming out? If so, did they shy away from it for awhile quoting how they are too old for it? People like using what they know works. Technology is the same, and people who love making games, love making games on familiar platforms because then theres no learning curve.

Given this fact, I say the PS4 and xbox 720 are doomed for the very reasons we just stated. Game developers who love making games won't want to develop on them.

Game developers are the ones who have been demanding the next gen tech from Microsoft and Sony. 

you honestly believe the bolded? 

Here is the problem ...

The executives at Epic Games do not reflect the opinion of the game industry as a whole, and they have a huge vested interest in pushing graphical technology to the point that the typical developer struggles to survive. Certainly there are lots of high profile studios who want more advanced hardware, but the silent majority is probably less excited about dramatic increases in development costs to target platforms with small userbases again.

I beg to differ.  I understand your theory behind the topic/ Idea but you left out one thing that affects the whole industry.  Sales.  Ok.  You say that engineers and developers are in it for the love and not necessarily the money.  Then why are the average salaries for these employees upwards of 80,000 dollars or more?  I dont hear about too many of them cutting their own salaries for the company, as a whole, to finish a game that is financially strapped or over budget.  They love what they do but im pretty sure they love their income too.  

Speaking of which.  What do you think the cost of a super console like the next gen is going to cost to develop for?  How many studios or publishers do you think will have the financial coffers to even fund the pre-production of games for such systems?  I mean if youve been keeping up with current events then you know a high number of studios have closed.  Even Sony has closed certain studios in their whole restructuring move.  A great number of studios who might have had one project that did not meet their financial projections have had to close. So this being the current case and environment of the industry, how many publishers and studios do you expect to take advantage of the next gen systems?

I think Nintendo is actually right on the money.  Yes their tech is, once again, behind the times but this time its only by a liitle.  Heres my prediction.  Sony and Microsoft will put out their consoles by late 2013 (Microsoft), 2014 (Sony).  But you will have the same amount of 1st day and 3 month launch titles as you did the previous gen which wasnt much in the beginning.  I predict that both these systems will cost 400 to 550 depending on the bundle skus they come up with for retail.  This cost will only appeal to the very hardcore crowd.  The rest will stay away from those prices.  Add in Ouya and the Apple market and you have a very dangerous spot for both consoles.  The first year sales and attach rate will partly determine if studios will back and develop for both consoles and wether the programming environment will be friendly enough to streamline game developement to get things done efficiently.  If not, these systems will have a hard time their first year on the market and wont see quality games for another 3 years. You could group the Wii U with this but given their price point and the somewhat added value of the gamepad, Nintendo is in a position to have their first 4 years of Wii U be highly profitable.  If the cost of devving is to high for Sony Micro then devs will be more than happy to dev for the Wii U, especially if the system hits 3 mil by 2014.

Given the articles written over the last 2 years about gamings graphical peak, it would be hard to prove me incorrect.

Yes, Microsoft is in the best position to take losses and I believe they will to some degree. But what you're suggesting is that they basically follow the pattern of what Sony did with the PS3; what makes you think they would be willing to lose billions of dollars just for the sake of power when they've not only seen the results of that this gen, but also capitalized on it?

Also, regarding your last sentence, there are also rumors pointing to the PS4 in particular not exactly dwarfing WiiU...

From Dual Pixels:

"Compared to Wii U, it is better, but not the biggest leap in the world according to developer friends of mine."

And if the "omniviewer" rumor pans out, you can bet that some of the tech horsepower will have had to be sacrificed to keep costs down.

True, however, a large percentage of developers depend on Epics engine and will use Unreal Engine 4 for next gen titles. If the Wii U gets those titles they will be dumbed down. The Wii U ports have been quite ok at best. When next gen comes they will need to work around the rules of the top western devs.

The difference is that WiiU will have a full year for developers to embrace it, without there being any other nextgen competition around. Wii launched with PS3 I believe? Second, PS2 was the darling of Japan, so again Wii being the 'successor' of the GC had a rough time with developers. Now, with the 3DS, Nintendo is the darling of Japan, and added with my first point, I think developers in Japan will flock to Wii U.

I guess what I'm trying to say is that circumstances are better for the Wii U than for the Wii, to lure developers. Hope that makes sense

Maybe, but one of the biggest buzz-words in game engine development is "scalable" ...

While it may not be important for a Mass Effect type of game, more and more publishers want to be able to produce a single game that can be played on everything from a cell-phone to a high end console without (too much) additional work. I could be wrong but I suspect one of the main drivers behind this is that publishers want to keep releasing games on current generation consoles while releasing them on next generation systems without needing to have two seperate teams.

For the first few years I expect this to really help the Wii U, while in the following years it will depend on sales.