Has the audience really expanded *that* much?
Yes. Significantly more people play videogames today and more are born every year.
Obviously, this chart only reflects Japanese numbers and is a few years old, but a twenty year old port of an NES game outselling the high-budget "next gen" Mario Galaxy?
I find it odd that you would use Mario (or really any Nintendo IP) as an example. Nintendo games are low risk, high reward products even with higher budgets. While I don't think the comparison is fair (the port was $30 less and sold mostly on nostalgia), it's important to note that Super Mario Galaxy still made Nintendo tons of money, certainly enough to justify a direct sequel using the same exact engine which also made Nintendo tons of money.
The audience may have expanded, but so has the selection available to them. Outside of a few HD Winners (Call of Duty, for example), the extra sales are in no way comparable to the increase in budgets from the NES-era to today.
The selection has expanded, but isn't today's larger audience also buying more games? Also, if you're going to compare budgets from 1986 against budgets in 2012, it looks a lot worse than it actually is since it doesn't take over 25 years worth of steady increases into account. Go back even 10 years ago (prior to DLC on consoles), budgets continued to rise but companies still made money.
Nintendo makes more money today than it did back in the 1980s, a lot more and despite the increased costs. Most games with really high budgets tend to be so popular that they make that money back at retail alone. Ultimately, companies sell DLC because DLC makes money and loads of it. They're certainly entirely entitled to do so just as people are entitled to not buy them. I'm just not convinced that DLC exists because budgets have risen. Content from micro-transactions take a minimal amount of work and yield high rewards.