The rise of development cost for sure cause a crash.

I think it was going for another crash, just think about it, if the Wii never show up (Nintendo left the console market) the market will only have two expensive choices, and the devs the same...

How many devs put some shovelware on the wii just to keep the HD project on float??

How many would jump to the HD consoles, how many would choose to stay on the PS2 or the DS???

One of the things that makes it harder is that the cost to enter the market is much higher.  The crash was primarily caused by a few things.  Atari failed to deliver new hardware.  The Atari 2600 was getting old, and the new one hardly changed anything.  Second, there was an oversaturation of the market.  There were 12+ consoles, many of which were carbon copies of each other, and tons of software.  There were countless companies trying to get a piece of the quickly growing video game market.  The only problem was that the things these companies produced was crap.  It made today's shovelware look AAA.  Quality games were buried beneath a pile of crap.  Word of mouth killed sales once people found out most games were crap.  These small companies making crap games soon went under, and retailers were left with countless cartridges and they had nothing to do with them.  They were thrown in the bargain ben for $5 and people looking for games (mostly as gifts during the holidays) chose them over the quality, normally priced games.  Thus, even quality developers faced terrible losses.  Almost every gaming-relaed company went out of business, and the only ones that survived were larger ones like Atari who also suffered major loss.  With todays market, a random company can't just start making games, and the market is stable enough so that a sudden influx wouldn't affect it as much.

Demographics.

One of the reasons for the crash is because there was not that many children in those days - the baby bust generation. (North America)

however, given the more children currently in North America than that period (Echo Generation), then this corresponds with more people buying "video games", along with the core group.

The law of diminishing returns. The input/output threshold yields become too high for publishers to prosper.

Mergers, buyouts and consolidations try to slow the process.
Middleware overtakes proprietary tools.
Sequels, licensed projects, me-too's and high budget cliched titles become common.
Closures and cancellations abound.

Hmmmm, exactly what we are experiencing now.

Unless a better business model is introduced for the next generation, the industry will crash or be wholly dominated by Nintendo given they already changed their business model.

Agree and this is why I think this generation could last longer than usual.

However one important point to make is that what will be next will not depend aggressively on graphic factor alone. Who will be the next to come out with the next big thing ?

Good answers, guys...this 7th generation might be the most important one, in the grand scheme of things, since the NES, no?

I don't know, likely neither CEO of SCE,MS and Nintendo know at this time.

Surely ( if it will exists ) it will spark new interest in gaming. 

Maybe could interest you this old Reggie speech from 2005:

http://cube.ign.com/articles/665/665952p1.html 

No, that wasn't an issue.  Have you ever heard of niche markets?  Some companies sell only 100 products a year and are still very profitable.  More consumers help, but it certainly isn't essential.

Ideally Nes and Wii are very very similar ( even the advetaisment has simlarity like the focus on the people fun with games rather than games themselves )

Wii is the second coming of Nes ( and Jesus )