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Rumors have it that both the PlayStation 4 and Xbox 720 that should launch around the end of this year will use eight AMD Jaguar cores. By modern standards, that means rather poor single-threaded performance. But eight cores means that in well-threaded programs, you get CPU performance somewhat comparable to an FX-4300 or two cores of a Core i7-3770K. That's not a top-end gaming system by any stretch, but it's decently capable, and console budgets really don't allow top-end gaming systems.
There are sound reasons why Jaguar cores should be attractive to both Sony and Microsoft. For starters, they're very small, so even eight of them doesn't take all that much die space. They're also very low power, so eight Jaguar cores at full load might still only be 15-20 W of power consumption. The above comparables of an FX-4300 or half of a Core i7-3770K will use vastly more power than that to give the same performance. Low power matters when you're trying to fit a console form factor. They're also made by AMD, which is one of the two vendors that can offer modern, high performance graphics (with Nvidia being the other). That matters if you want to integrate a CPU and GPU into a single die, which saves greatly on cost.
Less well-known is that Jaguar cores are designed to be relatively easy to move to a different process node. Most CPU chips never try to move exactly the same chip to a different process node, as if you're going to have to redo the chip anyway, you probably should make some changes to try to increase performance. But consoles do need to move to new process nodes multiple times to save on production cost, and have a fixed performance target with no benefits to adding more when you do die shrinks.
But then comes the huge catch: poor single-threaded performance. The general rule is that more cores clocked lower wins if your workload scales well to many cores, but fewer cores clocked higher wins if you can't use the extra cores. Games aren't that hard to scale well to use many CPU cores. But a lot of games just don't do it, for a variety of reasons. Will the necessity of scaling well to more cores in order to run well on the new consoles finally push more game designers to implement threading properly? Some games already do, but some don't.
A skeptic might argue that we've gone down this road before with the Cell in the PlayStation 3, and that didn't work out very well. But from the GFLOPS numbers claimed for the Cell chip and its claimed applications, it sure looks to me like that's only high performance in special cases, such as SIMD. That's not general-purpose enough to allow games to fully exploit the power available. While games can scale well to many CPU cores, they do need for different CPU cores to be able to do whatever they want without any dependence on what the other CPU cores are doing at the time, and without a ton of latency if you have to do things out of order. I don't know exactly what Cell can do, but if it could do everything needed for games, we'd have been using them in desktops and laptops a long time ago.