Here is a neat article (from the Inquirer, of all places!) on the mechanics of what happens in a console death spiral and why Sony is getting perilously close to falling into one.

I still think you can't discount the long term brand loyalty of the PS3 but I have to say I think the article sums up the situation neatly.  Why develop a game for the PS3 when you're looking at a lot of risk without a lot of reward?  The only way Sony can turn it around is with some key exclusives (titles or features) and I don't see that on the horizon -- yet.  Holiday '07 is still a ways off but if they're still faced with this dilemma in '08 I think that aspect of the console wars will be well and decided.