It’s impossible to say for sure who will bow out of the hardware race, or if indeed either company will. There have been rumors that OnLive might partner directly with either MS or Sony, but there have been no firm announcements, so it’s tough to say. Whether Microsoft will sort-of “bow out” of the next generation console race by keeping Xbox 360 going for the foreseeable future, using it as a client for an Onlive-style service that works with all Microsoft platforms, remains an unknown. But even if it does happen, it’s debatable whether such a move would constitute an “exit” from the hardware business.
But purely from a financial perspective, Sony would seem the most likely to quit the industry, based solely on their tremendous losses this generation. They have an amazing stable of IP, however, most of which could be ported to Xbox 360 and sold at a profit, or even better, streamed from the theoretical cloud service. Heck, it might even be cool to have a Playstation section prominently highlighted on Xbox Live’s service. I’d pay for access, and I’m betting that a fair few other folks would, too.
Whatever happens, in a world with a pretty bad economy and companies consolidating services and brands left and right to save money, anything is possible. Whatever the final outcome is, though, and whether Microsoft or Sony choose not to pursue another generation of hardware in the near future, it’s fair to say that neither the Playstation nor Xbox brands are going away any time soon.