For as long as more = higher price, many people will continue to not care.

It's not because people prefer a dedicated device.  It's because they want something cheaper.  Why should I pay $500 for a machine that surfs the internet, plays high definition movies, and video games, when I get can a $50 movie player, a $100 web appliance, and a $250 games console. 

When the cost of convergence becomes negligible or even cheaper to the alternative, then people will choose a device that does more than one thing.

It's like the cameras on cell phones.  Sure, they're still crappy and most people don't use them.  But they're in almost every cell phone!  And as the parts are getting better and cheaper all the time.  Once the quality of the cell phone camera begins to equal that of your normal camera (which in all honesty may not happen for a long time due to various reasons), I'd expect normal digital camera sales to start declining.

I'm not saying that video games are on the way out.  I'm saying that they will become integrated into a device that does that and a whole lot more.

to be honest half the comments i see you make seem to make me want to laugh at the prospect of Sony bowing (nay stumbling) out of the videogame market....

yet without your posts i would often defend Sony because i truly do not want to see it become Microsoft versus Nintendo, not just because of my dislike for Microsoft as a company, but i feel that they are truly not good for the videogame industry, i like many will agree that there are a lot of excellent games on the 360 but none of them have really pushed any barriers and none of them are actually due to Microsoft being a good games producer (Microsofts 1st party games are from studios they have bought out) nor to them being a good Hardware producer (360 failure rate higher than PS2 last gen...and not many people seem to remember the original x-boxes had a few problems with the power cable...didn't two or three x-boxes almost catch fire because of it?)

 I think my point is Leo-J, maybe if you wouldn't post crap, people might not start laughing at Sonys recent failure financially and with the PS3 .....i'm not saying you cannot have an opinion about PS3 selling double the Wii, but it's the way you go about it, JohnLucas makes crazy predictions about Wii selling double what anyboy elses best case scenario for Wii would be. (although as JL has had a few of his seemingly crazy predictions come true he has a little more credit to his name)

oh and btw, Adam didn't make any indication he was amused at the thought of Sony losing money.

Huge loses and I can see Microsoft bowing out before Sony. Sony will launch a PS4. There is no doubt about that. The console game needs to go back to Sony vs Nintendo. Wii vs PS3 would be good in the industry not 360 vs PS3 vs Wii. One competitor needs to leave the race, Sega couldn't handle increased competition. Microsoft is in the deepest hole between Sony and Microsoft. Sony is holding around -2 billion while Microsoft is at -7 billion. Theres a major difference and I cant believe shareholders are letting Microsoft throw away that amount of money. At least Sony has the PSP and PS2 to offset costs.

Great post johnlucas; there are 2 main thoughts that I took away:

1. That is a very interesting observation about Sony's internal decisionmaking.  They must know that bailing out on the PS3 prematurely would be counterproductive, but maybe the PS3 will be the last PlayStation no matter how successful it is?  

2. A pyrrhic victory is one that destroys the winner as much as the loser.  I would say that the PlayStation and PS2 victories were not pyrrhic, despite the relatively low profit, because they were in fact profitable and greatly so. 

The Xbox's "successful" entry into the video game market was definitely pyrrhic, and if the PS3 beats out the 360 but never gets a cumulative profit then that will be pyrrhic as well.  (For the PS3 example, a small profit will also be pyrrhic IMO because the billions of dollars spent in the loss-leader strategy will have had such a small eventual payoff that it was completely not worth it.)

for the OP question:  

As long as consoles make a profit the company will stay in the business; the Neo-Geo lasted a very long time despite the miniscule market share because it was never a losing proposition.  

Companies can bull through a period of unprofitability if they believe that they can get back into the black.  How much they can go into the red before drowning is a question of deep pockets and determination.  

Nintendo has very deep pockets due to massive cash reserves and 100% determination due to being ONLY a video game company.  They also have a knack for being profitable even at low market share.  People, Nintendo is not going anywhere.

Microsoft has extremely deep pockets due to Windows and massive cash reserves.  Their level of determination is harder to guess, but it has to be pretty high since they have proven their willingness to go several billion dollars into the hole.  I would say that Microsoft could be convinced to leave the industry if faced with another generation of small market share and massive losses, or two generations of losses.  

Sony usually has very deep pockets due to being a giant electronics company, with bonus points for manufacturing ablility.  But when the main company is not very profitable then they are not as able to fund the video game wing.  Sony's determination has been high but due to recent personnel changes it is unknown whether this is still true.  Also unknown is Sony's ability to remain profitable at low market share.  I would say that Sony could be convinced to leave the industry if faced with one generation of massive losses, or two generations of losses.  The fate of the handhelds would probably not be tied to that of the consoles, and vice versa.  Sony is probably the least able of the three to resist periods of hardship.