Higher costs hurt all developers as they all need to sell more to break even.  Larger developers have no more desire to lose money than smaller ones.  The difference between large and small developers is that the entry cost and risk factor may be prohibitive for smaller developers.

Finally someone in the industry says so.

I think all MS has contributed to gaming is their great online service. This gen, I have no interest in most "next-gen" games because it's the same linear games with shinier graphics. Boooring.

I disagree on Sony innovation -- I haven't seen much innovative from them besides the Ico/Shadow of the Colossus team's work in 13 years, aside from the fact that they killed console 2-D and made 3-D and "realism" the standard.

 I mean, compare what drove the Dreamcast to what drove the Playstation 2. SEGA would fasion their big titles out of all kinds of weirdness and stuff that pushed genre lines (Space Channel 5, NiGHTS, Samba de Amigo, Treasure games, Chu Chu Rocket, Dragon Force). Sony has a much more by-the-numbers approach to gaming.

The Wii has a lot of pitfalls so far, but being (somewhat) free from analog imperfection (tech that's 10 YEARS OLD) is a big step.

 Sony did invent dual analog in '98 I think, but since the controller wasn't standard, nothing really USED dual-analog at all until their next system. They just made it at the time so it looked symmetrical probably, haha. And Christ, they've used the same controller for 10 years now, with minimal enhancements.

I don't know how many people agree, but I think analog thumbpads really need to GO to evolve how well games play. Like a 48-way Sinistar joystick or bring flightsim sticks back or something. The tiny muscles of your thumb don't allow the control of moving your whole arm.

 Make no mistake All consoles are for Gaming! Innovation for gaming. Hence my decision.

 Since I see no "only" in my post, I take offense to blatenly calling me ignorant so quickly like that. 

If is conditional. If A is true, then B. B is not necessarily true if not A (though not A does not necessitate not B).

If I wanted to blatantly call you ignorant, I would have. There would be no "if" in my post.

Or condition C in which we both covered our asses in the post, but whatever, my original post was mainly an agree to disagree seeing as everybody has their different opinions on this matter.

This has been a growing problem since the Atari 2600 days when many games were made by just 1 person. It's unfair to blame Microsoft and Sony for what is basically technological progress.

I know Nintendo is getting a lot of praise for the Wii and it's keeping development costs down but they didn't solve a problem just postponed it.  Eventually they will have to bring out an HD console and have the same problems that the other consoles have.

A better quote on the effects of the PS3 and 360 on creativity from a better developer:

Making a 40 or 50 million dollar game is cool, I love making big games don’t get me wrong, but you have soooo many more masters with their hands in the creative pot when that kind of money is getting thrown around. Hopefully when the game industry becomes more comfortable with those budget numbers things will get better. -Cory Barlog

I think that's a major issue, and I think this is why we have 724,638,345,134 FPSes on the PS3 and 360. Everyone knows there is a market for guns and blood on the systems, so that's basically what the publishers are allowing the developers to make. You think a game like Zack & Wiki would ever have gotten publishing approval from Capcom for the PS3 or 360? Of course not. Big budget certainly can greatly limit developer creativity.

Edit: I should point out this is a 3rd party problem more than a 1st party problem really.  1st parties will fund more diverse games (LBP, Blue Dragon, etc.).  

It's not just graphics that is seperating games from this generation and the last.  There is also AI and physics (take a look at Star Wars: The Force Unleashed for an example of some of the new technologies that are possible because of the HD consoles and gaming PCs.  It can also be seen in strategy games in which it's now possible to have hundreds and even thousands of units (or the crowds in Assassin's Creed as a non-strategy game example).

Although there are some costs associated with improving AI and Physics, they're tiny in relation to the costs associated with the enhanced graphics; consider that Elebits used the Open Dynamics Engine and had huge quantities of physics based world interaction and was still a very inexpensive game to develop, and the improvements in most game's AI will come from licencing some middleware and adding one or two scripters. Thus, the increase in budgets of these games are going (almost) entirely towards the graphics.