The shift to consoles is not a cause - it's a symptom. People are moving to consoles to avoid the things Paranoid mentioned (the lack of quality and innovation, piracy).
It's not just the kids moving to console, either. I'm seeing guys in their late 20s and early 30s picking up consoles (again) and tapering off their PC gaming. Unless the console market tanks, you won't see these people come flocking back to PC gaming unless radical changes are made to how games are produced (ie. finish them before you take our damned money).
The gaming market crashed for similar reasons in the 80s and it will do so again. This time, it's PC gaming, but there is a haven in consoles (until the ship now/patch later philosophy kills that, too).
People are getting fed up with not being able to enjoyably play a game out of the box. Instead, they have to wait until patches finally complete the game they bought weeks or even months before. They see the ease of use of consoles games and their expansion into online and it sure looks attractive.
I jumped ship 2 years ago. The few PC games I've bought since only reinforced my decision. I still play PC games, but I am very careful about buying new ones.
I'm not surprised to see another company cutting people loose. I'm not surprised it's the "little people" getting cut and not the guys who are the ones pushing unfinished games out the door, either.
I'll be quite happy to see companies that continue to dump crap on the game market go under. Good riddance, and I hope the "little people" get picked up by other companies who have some idea what the words "quality product" mean.
The gaming public are also to blame for apathetically sucking down broken games on release day and accepting the "ship broken/patch" later model of business. I pointed this out ages ago and got reamed out as a Chicken Little by people with zero foresight or knowledge of the past crash.
Just wait, it'll seem to get better when Doom3 and HL2 hit, but wait a few years and see how the PC gaming landscape looks. It'll be here, but it won't be nearly what it used to be.