Somewhat, Second life, Mafia wars, Farmville, Social City, Billy vs Snakeman, and other similar casual free games don't cost anything to play, but you sometimes have to pay real money for virtual cash, so you can advance further in the game. You also have to spend a lot of time to reach a certain class or level in the game, so it can take away time from other games like RPGs, MMOs, Simulations, and FPS.
I don't think it's competing at all, because free flash games and stuff are nothing compared to console games or advanced PC games that you have to buy.
No I don't think that they are any competition at all. flash games are great to play online, however they don't have as much substance as a console game. I think comparing the two is a lot like comparing orange Kool Aid to orange juice.
Possibly when Flash technology becomes more advance then it can be some competition. But, certain games on Flash work well like older Mario games, classic games like Pacman, and space invaders. Plus, Bejeweled, and other puzzle like games like Tetris.
