I don't think the picture is bleak at all.
I agree with Opiate that there are certainly some self inflicted wounds though. Frankly, a lot of publishers bet on the wrong horse this generation or weren't willing to spread their bets.
The Wii has sold upwards of 90 million consoles and is still way above the $100 mark, a fact that belies its innards. Were Nintendo getting the third party support they should have gotten, and were Nintendo not trying to kill off the console early to usher in Wii-U, it would doubtless have carried on in a much stronger fashion. In fact, I do think they can milk more than a few tens of millions in sales from it this year if the console sees a price cut.
The problem is that this overbearingly strong Wii doesn't really help software sales a great deal, because third party vendors don't always have their best wares out for it. While we're at ~200m consoles sold this generation, games made for the HD twins are selling to a market of half that - or in the case of platform exlusives, maybe only a quarter. So there's a market fragmentation to consider here. But that system shock to the market aside, the 360 and PS3 have proven that they have the legs to go on. As other posters have indicated, the big drop this year is largely attributable to the Wii -- which lets not mince words here - still sold in excess of a million units in North America in December. 360 and PS3 are both experiencing growth, and will continue to, they are still at a psychologically premium price point and can only come down as time goes on. 3DS has joined the party and Nintendo have righted that particular ship, in February Vita, and sometime this year Wii-U -- clearly then, between price cuts to existing consoles and new and exciting products hitting the shelves, the market has plenty of ammunition with which to rebound.
Opiate points out Riticello's quote about Consoles only being 40% of the market but that is not to say the market has shrunk -- in terms of revenues developers can now hunt the market has definitely grown and expanded. The manufacturers of the HD twins might have blown a few billion on the investment, but those consoles are returning (or have returned) to profitability, and Nintendo have had their best generation in 20 years. There's no doubt the economics of the game are changing and that new channels of distribution are shaking things up, and in the console space - its undeniable that costs have been driving some devs out of business, but the talent never goes away - it just finds other work. The industry is growing, our hobby is probably more brilliant than its ever been, and consoles aren't going anywhere just yet.
