The reason for their failure is simple. Price. Sony made the big mistake of adding a blu-ray player that boosted the price out of most people's range (Sony has to maintain a pricepoint on blu-ray across all products). Because of low reach for the console, publishers could not justify the cost of making PS3 games. This had a snowball affect of making the console even less attractive to consumers and giving publishers more reason for not developing for the PS3.

Sony's solution is to simply lower their price dramatically to attract consumers. Blu-ray is not meeting the drop in DVD sales (because digital distributed movies are picking up a lot of that slack), so Sony should also drop the price of blu-ray in general. The blu-ray is killing the PS3 because the price has to stay up so not to canibalize (sp?) the pricing of other, cartel controlled, blu-ray player pricing (electronic companies do set price controls on technology).

The Playstation unit is in a little pickle. They want to lower the price but parent Sony has to protect its other properties too. Redesigning and manufacturing a blu-ray less console may be too much of a cost.

Blu-ray will be the death of PS3.