The issue is more complicated than people seem to think. It's not a matter of console capabilities vs. PC capabilities, that's a foregone conclusion. What's more PC gaming was bigger than console gaming for quite a while.
I think people are overlooking a few important factors such as:
1: World Of Warcraft (and other MMORPGs). I'm sure we've all noticed how much time people put into MMORPGs in general. The thing about them is that people that get that invested in one game that they play continuously, do not wind up spending that much money on other games. It happens, but not as frequently as it was before when people would play a game for a month or two and then be ready for other games. When looking specifically at the PC gaming market this kind of thing has had a massive impact.
What's more, it's not really a competitive genere. Few companies are willing to invest the time and money into making a competitive game in this field. You can't just cough up a couple of million dollars, attach a subscription fee, and have a successful MMORPG. The first games that were invested in properly set a very high bar, and then continued to expand. A new game being produced has to compete with those games.
I say a "few games" because I think people miss the point that the MMORPG community is not totally WoW-centric. Sure it has the most massive group of players, but there are other games that boast communities of a hundred thousand or more players. When you take the majority of those people out of the marketing equasion for the majority of games, they add up to a substantial part of the problem.
Sure there are some games like say "Starcraft 2" and "Dragon Age" that have pulled away MMORPG gamers for a time, but that's fairly uncommon. I think part of the problem is that tons of titles have been released and then languished there because they just didn't generate enough interest from the guys playing MMORPGs. Heck, even MMORPG players will frequently claim that they buy less games than they used to.
2: There is also the delusional aspect of all of this. Simply put PC game developers and producers have gotten it into their heads that there are pirates under every bush. They tend to focus as much on how many times they think their games were stolen, as on how many copies they sold and whether or not they made money (and how much).
The self-deluded nature of the games industry has lead to a ton of draconian DRM schemes, digital downloads (perhaps disguised on a disk), and an increasing reliance on client services like STEAM. All of these things born of paranoia and greed have created an enviroment where legitimate PC gamers find their platform of choice a major pain. Nobody wants to jump through 47 differant hoops and be online (at least to activate) to play a game.
Consoles have the advantage of the games being harder to pirate, thus generate less insanity from an industry that has taken up bean-counter worship, and views project profits as an entitlement handed down from a burning bush, rather than wishful thinking (and thus does stupid things like borrow against money they don't have, compounding their problems, when they say merely make 10 million in profits after covering expenses instead of 30 million some weenie in a business suit told them to expect). From a user perspective you can just pop in the game, and go, even if there is an install it's typically no big deal. The vast majority of games don't require you to be online at any point either, making internet a nice conveinence rather than a definate nessecity.
3: Slightly connected to the above is also what I think of as the "Tantrum Factor". Simply put game developers convinced themselves of this golden age of PC gaming where they could produce games with draconian EULAs and then actually enforce them through digital distribution, with customers effectively receiving nothing for their investment of money, and giving the producers and developers total control.
Not to mention all that glorious cash that they could rake in by cutting out packaging, production, and distribution and pocketing that expense money as pure profit.
The problem of course is that there are no benefits to this for the consumer. We lose control over what we paid money for. We also become dependant on the continued existance of download services to access our games. Look at the panic GOG's stunt caused, and they are selling relatively inexpensive, older games, not ones that people are paying $50 a pop for. A person buying a game wants to be able to stick their disc into a drive 10 years later and install/play it (hardware permitting)... even if the store they bought from closed, and the company that made the game no longer exists (as we all know happens, I mean look at companies like Origin, Troika, Black Isle, and others that all dissolved or were bought out).
Not getting what they want has caused the game industry to want to gravitate away from the platform. This is not as big an issue as #1 and #2, but it is a factor. We keep hearing "Digital Downloads are the way of the future, it's coming, whether you like it or not!" but at the same time you see the producers and distributers moving away from the PC and regrouping because simply put they aren't getting the sales they want, and efforts to hide digital downloads on discs to get people use to the idea are making PC gamers wary of even buying physical media.
Yes, things like STEAM are making decent money and moving decent numbers of games, but the market is trivial compared to what it could be because relatively few people buy games that way. Your typical gamer is going to go console and own his game right now (despite them trying to go digital too), I think people, and the gaming media in paticular (who are more or less making their paychecks promoting what the industry wants) undervalue how big a factor this kind of thing can be.
I call it the "Tantrum Factor" both because it annoys me, and because on a lot of levels it remdinds me of a petulant 4 year old being told he can't have something, and then sitting there stamping his foot and being annoying until he either relents and goes away (which is always an annoying process which seems to take forever) or the adult relents and gives them what they want (which is typically a bad idea). In this case instead of a snack food, or a toy in a department store, we're dealing with digital download technology which shines brightly in the eyes of the game industry because of all it can do for them, but really has few benefits to the consumers. With all the DRM, and the need for client services, internet verification, and similar things the big arguement about conveience doesn't even really apply despite attempts to sell it that way.
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Such are my thoughts, and no, I am not being especially nice or diplomatic here, but what can I say? I have strong feelings about it. I don't think the gaming industy walks on water, and hard core criticisms are well deserved.
My point is also that (as I said to begin with) there is a LOT more to this than just hardware. I do not think PC gaming is dying so much because of the consoles, but because of industry attitudes, and also the simple fact that for PCs we're in the age of the MMO, and the bar for PC games has been set ridiculously high, where with consoles there is a lot more room without MMOs to make money with very generic games and what amounts to mid and high budget shovelware. You can't crank out "Space Marine FPS #324341: Assault on Planet Generica" with decent graphics, but deritive gameplay, and expect the same kind of returns because that isn't going to drag the core audience away from their MMOs which is a concern today. On the other hand a console gamer has probably just gotten burned out from the last "Call Of Duty" after a few months and will sit there and say "yeah it's generic, but your not considering the multiplayer!". Multiplayer being a life extender that doesn't involve quite the same long term investment as MMOs.
Also while I'm rambling a bit one more big point:
There is a lot of supposition in certain forums that one of the big reasons we have not seen MMORPGs on consoles is because of exactly the concern above. If you release a really good MMORPG that gets millions of users playing non-stop, a lot of those people are not going to stop for the newest release. I think parts of the industry are walking a fine line in not wanting to say "no" and alienate people fond of the idea, but at the same token are making it deliberatly difficult and causing the stumbling blocks people have tried to make them have hit. Sure we've had a few like "Final Fantasy Online", and we're about to see "DC Universe Online", but those are rare exceptions and think of all the games like "Age Of Conan" that were more or less axe murdered despite plans for a console release.
That's supposition though, not anything anyone knows for sure. However given the unwillingness of Microsoft to work with MMO developers (despite the claimed reasons) and the factor with PC gaming, I can see the logic here.