A couple things
First, I own about 5 games that are more than one DVD in size.
Second, Microsoft and Sony don't make money off the console, they make it off of the individual game sales. And if you think they don't sell enough games to make up for any losses they have, you're terribly mistaken. They sell games by the millions, and make huge profits from them. The gaming industry is a really big industry, and sales are in the billions of dollars a year, and are expected to more than double through the next few years.
You also have to take into account that Microsoft and Sony don't base their company off of games. The majority of their profits come from elsewhere: Microsoft has Windows and other computer software, Sony makes electronics. They can easilly afford to take any hit from their gaming section b/c the rest of their profits far outweigh any losses they could possibly incur from their gaming section. Their profits are in the billions, who says a couple millions in losses will hurt them?
As of right now, the PS3 is estimated, and almost guaranteed (still waiting on the final word from Sony) that their price will be set around $400-$500.
And one more thing. The majority of games are not made by Sony or Microsoft, they only license the games. Games are made by actual professional game-designer studios, like super power Electronic Arts, Capcom, Square Enix, and Activision. The costs of producing games are burdened by these companies, not Sony or Microsoft. Sony and Microsoft pay to have the game made, licensing it out to whoever can do it.
On a final note, which could be an impact for the rest of games out there, Activision announced that they would be raising the prices of games they make for the new systems by $10, to $60. This could be caused by many reasons, like how much more sophisticated the games have to be now. And yet, these top game-making companies are boosting their game development spendings by 30-40%, to over $450 million, some as high as $600 million.
Makes you wonder where the money is doesn't it? They're smart, they know what they're doing. Companies are only getting bigger, and people are only buying more.
http://seattlepi.nwsource.com/business/ ... mes05.html
http://www.dfcint.com/news/prfeb112003.html
You can find all of this at the above link, and I can easily find more, like the quarterly earnings of all the companies, comparison charts, the internet is loaded with it. I did a research paper on this once, and there's tons of info just floating around.
http://www.npr.org/templates/story/stor ... Id=5199969
http://www.npr.org/templates/story/stor ... Id=4172753
Here's even some radio shows that you can listen to.
http://www.gdconf.com/
And this site is pretty interesting too.