Basically, most video game systems are sold at a loss. For instance, the Playstation 3's 60 GB model cost them $750 to make. Selling it at $600 means they lose $150 on each one they sell.
However, selling games is very profitable. After they finish paying for making the game (developer paychecks, etc.), the rest of it is pure profit (after all, how expensive is it to make a DVD)
So basically, their goal is for you to buy the system AND a lot of games, so they offset the money they lose on the actual video game system. This applies for pretty much everything except Nintendo systems (The Wii and DS are sold at a small profit).
The point of making new video game systems is to make them appealing to the consumer so they buy it AND a lot of games. That said, it's generally accepted that Sony jumped the gun on the PS3, and probably should have waited until this year to launch, letting the PS2 keep running last year.
Honestly, though, if you don't have any of the next gen systems, the time of video game system death is generally a great time to pick up all the games you missed earlier in the system's lifespan. I bought about 8-10 N64 games at the end of that system's life for about $10 each, mostly at Blockbuster, but frequently at retail. With the PS2 dying, this is the perfect time to pick up games you always wanted to play but didn't originally have the money for.