A combination of the failure of Nintendo's home console, the shrinking handheld market and the movement of the "casual" market to mobile is responsible for a lot of the apparent shrinkage. That said, the core home console market will likely see some growth (relative to the length of the generation), as well as PC gaming becoming more popular.

In simple terms the largest chunk of that market reduction is due to Nintendo's current decline.

People should not take for granted anything at the start of a gen. To put things on perspective...

- PS2 launched in March 2000 and Wii in November 2006.
- PS2 ended March 2000 with 1'41m, Wii ended March 2007 with 5'84m. Basically Wii had a 4 month advantage over PS2 in this comparison.
- After finishing its first complete fiscal year PS2 had already shipped 10'61m total consoles (ending March 31 2001), Wii shipped 24'45m (ending March 31 2008).
- After finishing its second complete fiscal year PS2 had already shipped 28'68 total consoles (ending March 31 2002), Wii shipped 50'39m (ending March 31 2009).

So it can be seen how Wii beat PS2 brutally in the first years of both systems, but look what happened later. PS2 ended with around a 60m adavantage over Wii.

If PS4 don't beat Wii numbers in the first 2 years but is just right behind and then keeps the same pace PS2 had in its day i don't see why PS4 can't reach 150m someday...The total 8th gen will be fine, the only ones who will be sacrificed are handhelds.

In conclusion...

PS4 - 150 million
Xbox One - 70 million
3DS - 80 million
Wii U - 25 million
Vita - 20 million

Total: 345 million

I explicitly DID address R&D costs.  Thanks for taking one sentence fragment out of context and ignoring everything else. 

Apparently I was basing that on Sony comments saying they are marginally profitable with 1 game sale and 1 year of PS+.
Immediate profit or loss, or closeness to profit, etc, is obviously relevant to the overall picture by being that much closer to overall profit.
Again, not sure why you're taking that out of context to make it appear as if my entire point hinges on immediate profitability,
when the focus of my post is on the overall longterm picture for the generation, i.e. relevant to the topic of the thread.

 I didn't say it doesn't matter, in fact I specifically address a smaller intall base for the gen as a downside.
But if 2 gens can be compressed into the time of one, each with 60% the sales of a longer gen, that certainly is a counter factor,
especially when they are architectural evolutions allowing full BW-compatability and easy 'HD upgrades' in exactly the same game, not disrupting game sales.

I mean, Sony themself directly state that they expect this generation to be shorter.  Why would they set out for lower profits?

I'm baffled why, if your goal is communication with other people, you do not start by asking people friendly questions to clarify their intent instead of REACTING to minute sentence fragments without considering their context?  And if that is not your goal, what IS fulfilled by engaging in the forum here?  Howling at the moon is always an option if you feel in the mood.

I'm assuming we will see something like 45-30% contraction. That may seem drastic to some but even the PS4 isn't doing much better than a console that may have peaked last year. I have no reason to believe that it will do amazingly well in it's final launch region as most of it's software isn't geared to that region. Sure CoD and GTA are getting bigger in Japan but I don't think it will be enough to make PS4 sell and saturate like the DS or PS2.

So using current last gen numbers at 500(496 rounded) million that would leave us somewhere from 275-350 million sold 8th gen. Breakdown:

3DS 90-105
Vita 25-40
Wii U 30-45
PS4 90-105
XO 40-55
Total 275-350

3rd party games are too samey as no one is willing to fund a risk but Nintendo. They quite literally can't afford to innovate due to the AAA business model. There simply aren't compelling reasons to upgrade hardware in terms of new types of software. I can honestly say the most compelling thing about this generation of consoles is very slight technological conveniences and a prettier sheen. I can only hope the indie market through quality raises game value and has that Atari like variety we so sorely need to prevent this from being stagnant.

PS4 - 85 million
Xbox One - 50 million
3DS - 75 million
Wii U - 22 million
Vita - 15 million

Shorter cycle, loss of non-hardcore gamers, intense competition for gamer time/dollars (LoL, Heartstone etc.). Handheld market under intense pressure from mobile.
To me, the biggest problem isn’t the hardware numbers, but the cost of development. We need huge install base to sell huge number of games (much bigger numbers than 7th gen) to offset the cost of development.

There is a good number of Japanese titles coming out for PS4 this year, as well a broad variety of non-Japanese 3rd parties, beyond FPS etc.

Realistically, Sony is probably better off with slightly lower Japanese sales and diverting that stock to US and UK to lock in market share.

By your estimations, that would be about a 40 % drop in console sales.

I dont like to make predictions, but I think you can be about right about the total sales. The industry have been experiencing declines for some year by now and the new consoles doesn´t seem to be cathering new consumers to the market. YoY business is always smaller every week.

A good chunck of last gen consumers moved to mobile, tablet and PC gaming, and with the current prices the console market, be it home or handheld, are not being successfull in bringing them back. Videogame is becoming a niche market again.

I do believe no device will reach 100 million units sold again, perhaps the PS4 and the 3DS may get close. Every main brand will  probably have lower sales than their 7th gen installments. 

For the core on home consoles you have to go back to the 6th generation and the ~140 million in sales (not counting the millions PS2 sold between 2006 and 2013) it made, not the blue ocean inflated 260 million of the 7th generation, as the point from which the core base will grow. 8th gen will be very fortunate to make a combined 160 million for home consoles, which is about 15 million less than I'm predicting. My prediction is pretty much flatline compared to 6th gen.