The problem with custom built is that not everybody can do it. Not everybody wants to do it. I've had horrible experiences building computers what with friggin BIOS and driver updates and trying to figure out why in the [censored] it won't boot up. Making sure you're buying the right mobo/proc/mem combo. Trying to figure out what you'll need for power. Buying the Windows OS and we haven't even touched on actually putting it all together. It's a [censored] pain in the ass.
Not everybody has the know-how to build a computer. So, those who don't are more or less stuck with pre-fab PCs or consoles.
And when it comes to making the decision between a $1000+ (but really, a LOT more) computer and a $300-$400 console, there is no question about which to go with. You also don't need to upgrade a console. Any game that comes out for it, you'll be able to play without ever worrying about specs and spending more money on upgrades. PC gaming? More often than not, you'll be checking to make sure you got the specs to play a new game. Don't got the specs? Upgrade... by spending more money.
Yeah, definitely, building a PC from the ground up isn't for everybody. It requires a lot of patience and technical comfort, and not everyone is willing to invest the time and energy to do that when they can just buy a console or a prefab PC. I feel like a good rule of thumb is, if you're comfortable with DIY stuff, build a PC; otherwise buy a Mac and a console.
But I've got to disagree with your cost estimate. I built a PC with very nice specs that will run MW2 (as a for instance) at max settings without a hiccup for under $700, including a nice monitor. If you're willing to spend some time hunting for good prices, you can definitely stay under $1000 for the whole deal. And buy an OEM copy of Windows, not a retail copy. You'll save a few hunge.
Sure, a console is cheaper, and you don't have to upgrade it, but you also CAN'T upgrade it, if you see what I mean. For example, let's say I spend $800 to build a PC this year. Next year, I spend $200 on a new video card. The year after I might spend $200 on a faster processor, and I've still got very nice specs, more than adequate to run new games at max settings. If I bought a console, I'm dealing with inferior graphics and processing right from the get-go, and I can't upgrade at all. Consoles start out with weaker specs than a PC and can only get worse in comparison. So yeah, you can play any games that come out for that console, until they stop making them, but they won't look as good. You also can't do anything else with a console (like type a paper, or , and you're limited to a more narrow range of games.
And in fairness, if you've spent $1000 on building a PC and you're not meeting minimum specs for games, you're doing something very, very wrong...