I've thought about this as well, and I don't understand this business at all. MS has done nothing but lose billions on both Xbox consoles despite their popularity, and Sony has lost billions on the PS3. Yet they are both making another new console. Nintendo has always made money, so I understand why they keep doing it, but the other two just don't make any sense. My head hurts.
Both consoles are now synonymous with their makers. I imagine both of them got into the market hoping to make profits but have ultimately failed, however at this stage because they're so well known for their consoles, if they were to back out it would be a huge admission of failure, and probably do catastrophic damage to their images and stock prices. Obviously Microsoft could easily survive such a thing, but they also have no problem with leaking so much cash, so why not keep it going and look good? Perhaps if Games for Windows had managed to be more successful and as big a brand sign as Xbox they might have pulled the plug. Sony on the other hand? They're struggling in areas other than PlayStation. If they destroy one of their biggest brands, it could probably kill them quicker than if they were to keep losing money on it. May as well go down stubbornly fighting.
As big as the Xbox brand is to us, it is miniscule compared to, say, Office, in terms of revenue and brand ID. If they killed off Xbox (or more likely transitioned it to their larger media brand) it would not do them any harm.
Sony could continue their Playstation brand as a publisher badge without much notice. ("Playstation: One Step Beyond" 
) Sony's real problem is figuring out their identity in a world of consumers that cannot tell the difference between Bang-Olufsen and Hitachi. There is no money in electronics anymore (outside of the uber-luxury and low-end commodity market). Playstation is the least of their problems.
EA however, is shooting themselves in the foot with Origin. What are they trying to prove at this point? All these publishers should be making money of their gargantuan back-catalogs where ever then can.
"As big as the Xbox brand is to us, it is miniscule compared to, say, Office, in terms fo revenue and brand ID. If they killed off Xbox (or more likely transitioned it to their larger media brand) it would not do them any harm."
That was partly my point, but they're Microsoft so it doesn't really do them much harm if they continue at a loss, either. And any business as big as Microsoft is going to try and encroach on every territory they can, whether they make money from it or not. Doesn't matter if it's not as big as their best assets, it's still another way to be seen and contribute brand awareness to those best assets.
Not sure I agree about the transition with Sony. If they were a publisher, then the PlayStation brand's relevance is only within the gaming community. What can they do with it from a marketing perspective? Stick thier logo at the end of the ad and nothing else. I suppose they still use the walkman to pimp themselves out, though... Also, I could be a few years behind here, but last I heard they were losing money on their computers and televisions as well, so it's not really the last of their problems. Maybe their worst, though? Or has that changed more recently.
The identity thing I agree with 100%. Vader or someone said on a podcast awhile ago that they used to be considered back in the day the best for televisions and the like...but that was never the case. They were always somewhere in the middle for quality. They were great, but good value; meaning that they were far from the best, but among the best that most people could hope to afford. That market has pretty much dropped out, as you said, and Sony hasn't (once again, tell me if I'm a few years out of date) come to terms with that.
You've done a good job of sumarizing perhaps why they got in, but why stay in? They only reason I can see MS staying in at this point is to try and be the iTunes of your TV. Sony I think is frozen in the past with thinking that the company that sells the most boxes wins.
But it's about content now
They want control of your living room. I'm sure MS and Sony imagined a space where the console became the main entertainment provider for everything. I'm sure they get a cut of whatever netflix is charging or whatever. For MS I see it as a prestige thing, they lost too much money, I guess they are bored of PCs and seem to be branching out to gobble up everything, anybody else does. iPod popular? Zune! iPhone popular? Windows Mobile. iPad popular? Surface! Playstation popular? Xbox!
Sony, have had great sucess with PS in the past and they could reclaim that top position as gaming exists in cycles, some you win, some you lose. The rest of Sony hasn't been doing good, the gaming wing is one area where they are a winner.
Nintendo is just Nintendo, they make hardware and sell their games on said hardware. It's their business. Sometimes I've wondered if it would be better if they canned either consoles or handhelds and had all studios working on one platform. You would have super support.
I was on Steam yesterday and wanted to get some good sports games, specifically a golf game. There are none. There are some jokey ones, but not simulations. In fact, there are a lot of areas where Steam is not particularly deep. So I set up an Origin account, no problem, just another password etc... And their stuff at EA is pretty shallow too. No back catalog, no good sales. They are squandering their legacy by not providing x86 emulatros and selling their old stuff for cheap. No sports games other than this years (wankers).
Then I started thinking about how Halo was not in either space, nor Uncharted, nor Gods of War, nor Super Mario Galaxy and I was stuck with the thought of, okay, Sony is promarily in the software business at this point, why wouldn't they want to get their software on every platform, just like they did when they were Sonysoft? Is there really that much money to be madein selling a hunk of hardware? Moreso than what you'd make if you sold your software everywhere?
Which prompted me to ponder why the three console makers actually make consoles:
- Microsoft: To create a media sales platform for movies, music, TV and games. To create a software-as-service model (XBL subscriptions). To generate consumer good-will toward the larger MS brand.
- Sony: Who the fuck knows. I guess to create a sales platform for movies, music, TV and games. To provide a stream of cash from licensing rights.
- Nintendo: Inertia. They've always done this sort of thing, seem to be pretty good at it, and besides, what else would they do? This is their core business.
I could not help but think that in the case of Sony and Nintendo they'd be much better off sellign their software on as many platforms as possible, given the quality of their offerings, though in the case of Sony's other media holdings I can see why they would (stupidly) cling to the idea of making an selling a Sony-Media-Box (even though at this point they are just making a mid-level PC with a Sony logo on it).
Again, I ask this a lot, are these companies misguided, got their shit together, moving on inertia and where do you see this going?