Man if this is the case for a small indie game, I can't imagine how AAA games are doing. No wonder we are seeing more failures than ever.
I actually live in Tokyo right now (moving to Korea for three months tomorrow), so I really need to get to sleep now. (On that note, it's cheaper to live in Seoul and Tokyo than in Los Angeles...)
Indie games on the PSN and XBLA haven't been doing so well. I don't know of/can't say specific numbers, but a lot of games aren't selling that well. Papo & Yo is an example of a game that sold decently well on PSN, but didn't recoup it's investment. They effectively used the PS3 release as a way to advertise their PC release, which will end up turning the game into profit.
As for AAA games, what has happened over the past 7 years is many major publishers just aren't developing games anymore. They're basically developing one game. THQ didn't go out of business because its games weren't profitable (well, some weren't, but that's another story), it went out of business because it was pumping so much cash into all of the games it had been making. The people were trying to run the company like they were back in the PS2/Xbox/GC days, where development costs were lower. It's much harder to run out of funds when a game costs $10M than when it costs $30M.
Look at Sega, EA, Activision, etc. They all used to publish hundreds of games a year, but now each company only has a handful of releases. I am too tired to look at exact numbers, but the PS2 at this point in its life cycle had something like 4-5 times the number of games than the PS3 does.
I was a huge fan of the .hack series (there was no second series, just like there was only one Matrix movie). Each of the four games sold... 250,000?... copies on the PS2, and Bandai was like, "Holy bukkits! This is awesome!" Nowadays, if a disc-based release sells 250,000 copies, it either had an extremely tiny development budget or the developer is going out of business.