Can the console industry survive?

There’s an article on the Washington Post today called “From Print to Web: The Washington Post goes Digital”. It’s a remarkable story in that it describes how one newspaper is remaining profitable in the Internet age, as many papers are struggling to stay afloat, merging into large conglomerates for cost-saving purposes, or folding altogether.
It is merely the latest story in the long tale we’ve been hearing the past ten years, all about how old media companies need to adapt to the ramifications of the Internet in order to survive. Record companies are perhaps the poster child for what NOT to do; newspapers and local TV are struggling but hanging on by their fingertips.
What’s interesting about this for the game industry is considering how little the US game industry as a whole pays attention to this phenomenon. Sure, we all worry about DRM a bit, we worry about someone hacking our game and posting it to the torrents or Usenet. But what is going to happen when, like news on the Internet, anyone can make a game and post it up for people to play? We see reports now of people spending more time on YouTube and less time watching television; what will happen when people are spending their time on Kongregate instead of buying the latest game for their Xbox360?
Console manufacturers have attempted to stave off the tide of user-generated games by adding casual games to their downloadable content model, but will that be enough? Will the console model of strictly regulating content survive in the age of the Internet? Or will user-generated games flood onto the market and make console manufacturers with restrictive policies obsolete?
We’re seeing a huge rush into casual downloadable games for consoles at the moment, but it’s just the tip of the spear. What will happen over the next five years? When will we see freely available user-generated content tools and a distribution system open to everyone available for ALL the console platforms?