Ok I know the chances of this happening are very slim, but I think it is possible. Here is a example scenario:

Microsoft seeing a chance to kill the PS3 throws ridiculous amounts of money at HD-DVD. All the big studios come over and HD-DVD becomes the new standard. This prompts a sharp decline in PS3 sales and a big uptake in 360 sales. Developers declare they will wait to see if the PS3 survives before continuing development on PS3 games, except for those that are almost done. This is a critical blow and consumers stop buying for fear of no or few new games ever coming out for it. With this blow to the Playstation brand the PSP sales start to rapidly decline and with its already poor attach rate development for it gradually ceases. It is dies out slowly within 6 months.

Anyway, let me say it again. I know that the chances of Blu-ray, the PS3 and the PSP dying are very slim, but as it is possible, I think it is interesting to speculate.

Would Sony survive? Would they release a PS4 and a PSP2?

I think yes and yes.

Sony have their fingers in a lot of pies. The gaming pie may be a big one, but I am pretty sure they have always been making profits despite the large losses the gaming division has been experiencing (I tried to find a graph of Sony profits but couldn't). I think it would take a number of divisions of Sony exeriencing similiar cataclysmic failures for the beast to be slain. I think their other divisions are on much stabler ground than the gaming one so I can't see them dying quickly like this.

I would still see them releasing a PS4. They are a company with a lot of confidence and I think such a failure would brand into their minds what needs to be done for the PS4. With the confidence of this learning experience and the vast potential money to be made in the gaming industry, I can't see this as enough to scare them off. PSP2 I think is less likely given how fearsome the competition has become, but I still seeing them having a go of it. I wonder if the PSP has made a profit overall for Sony.

As an aside I would hate to see them go. I think the make a number of good products and the gaming industry particularly needs them for the competition they create.

no it isn't. Nintendo's stock passed Sony number for just a moment.

Nintendo is not worth more than all the divisions of Sony throughout the world.

Sony = Major recording label, Sony,Coloumbia pictures, Makers of TVs, Cellphones, Mp3 players, Dvd players, Stereos, Laptops, Sony Financial Holdings (yes they also do insurance...), Sony chemicals (and yes they make chemicals also..), etcs

Sony is one of the more popular brands in the world, they can easily get more money if they were in a hole or in big trouble. Bluray and PS3's future may be unproven but the PSP is already a success even with the lack of software. But to answer your question... if the PSP,PS3 and bluray were to fail, Sony would take a big hit but still easily survive.

Companies like Sony, Microsoft, Nintendo, General Motors and Ford simply don't disapear because they have lost a lot of money ...

That being said, the PSP has sold so well mainly due to the Playstation's brand being able to attract both consumers and developers towards a platform. With continued poor performance from the PS3 along side the less than amazing performance of the PSP the Playstation brand will take a very large beating. The PSP2 and PS4 will be systems which could (potentially) kill off all remaining good will if they are handled poorly which would put Sony in a position where they would have to consider whether they even wanted to continue in the videogame industry.

As a weird side note, reading Next-Gen.biz over lunch at work (Due to virus issues, my network blocked this site... damn), they noted that Sony is selling 3.2 billion dollars worth of shares in it's financing company.

Now, from all accounts, that aspect is performing just fine, so there was some hopeful speculation that the capital would be put towards the gaming division, give it an enormous kick in the ass and help assist in PS3 penetration.

Stock price does matter, because at a certain point they become an attractive takeover target. They would get bought out long before they ever went bankrupt.

I would potentially argue that Nintendo is worth more than Sony ...

Sony has high revenues but they also have very high costs so their profits stay reasonably low on the whole; this results in a very low profit per-share ratio and slow growth rates.

Nintendo (on the other hand) has lower revenues and dramatically lower costs which means they have higher profits, better profits per-share and a faster growth rate. When you consider what their profits could be like in 2 years if they continue to dominate in the market like they have been, it becomes clear that Nintendo has a far superior business model and may be worth more.

 You are only thinking about the games division right?

I don't know about all Sony's division but they were doing pretty good in some of them.

I think it also needs to be considered that Sony's games division is their most public division. If they fail it hurts the Sony brand much more than say a series of cameras or TVs failing.

Nope, Nintendo as a profit generator is making and is expected to make more profit than all of Sony's divisions combined.

Some people seem to think having more 'stuff' makes Sony more valuable. But 'stuff' comes with expenses such as salaries, rent, taxes, depreciation, etc. If 'stuff' doesn't make profit, than it's worse than having nothing at all.