I think the 90% piracy rate on PCs had something to do with it (piracy on Xbox360 was around 10% for comparison).
I know plenty of 360 owner, and only a couple have one or two legit games.
Piracy might be that low in the US, but it's a different thing outside the US. The 360 sold a lot more than the PS3 at some point because of the cost of games and the fact that the former could be pirated.
Then publishers put on DRM and you had the whole SecuROM fiasco that burned out optical drives.
All the Xbox did was show that between the Xbox and PS2, consoles were getting "good enough". The PS3 and Xbox360 basically said that things were pretty much there and consoles were no longer the huge compromises they once were when compared to PCs.
Publishers switched over because you could develop for PCs and load it up with DRM crap, or develop for consoles (which were "good enough") suffer less piracy and get more people paying for it. And people were buying consoles as well because it was more "social" and fun to play on the big screen TV than the little monitor.
What's happened since then is the universal DRM for PC now - Steam. And the proliferation of Intel graphics cards (around the time of the Xbox, people still used external video chips) which basically meant 90% of PCs sold were doing fairly poorly in the graphics department (and NVidia and AMD/ATi saw their marketshare dwindle as people rushed for cheaper Intel graphics).
But, the PC adapted - no longer were AAA titles going to PCs, which meant indie games rose in prominence - a good indie game (most are crap, still) now has a huge hungry base to which people would buy them and play with. And since these were low-budget productions, DRM wasn't really an issue, since piracy tended to help. And these games worked even on piss-poor Intel graphics, which meant huge market. Plus the rise of mobile gaming helped.
Consoles this round took notice and if you're paying attention, you'll see both Sony and Microsoft are trying hard to attract indies to their consoles.
The (few) most popuar indie games have pretty good graphics, and are pretty good AND successful. AAA games don't exist any more (on any platform), all those franchises have been brought by EA or alike and burnt to the ground (Simcity? Mass Effect? C&C The list is endless!).