I actually disagree.
I think your right about the cost of production getting so high, however i think we will see more and more companies offering specialist outsourcing solutions.
We can already see this in physics with the Havok engine, and i think it will only be a matter of time before a company offers a realistic water simulation. After that who knows, realistic sky and cloud, realistic skin texture and depth.
All developers have to do then is buy the tech at a fraction of what it costs to produce it and then integrate something that has been developed with more man hours than they would be able to put in themselves.
I think that then the cost of development will remain high, however it will come down in some areas (Water simulation) and then be made up in other areas (Fluid character movement).
just my $0.02
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Leading the "Support our Arrow keys" movement!
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Diablo & Diablo 2 for the DS, it makes sense Blizzard!