From Gamasutra this morning, from former Sony Europe boss and current Codemasters chairman Chris Deering:
Despite all this growth, however, Deering warns that current development costs, currently in excess of $10 million for major titles, are unsustainable, given that less than 3 out of 10 games actually recover their costs.
Moreover, he says software sales may decline even as hardware proliferates. "Traditional revenue sources will not be sufficient to fund games development," he says. "Especially as global retail sales will be 20 percent lower in 2011 than in 2008."
We're still a hit-driven industry (where a profitable game will pay for a larger number of unprofitable ones), but the margins of profit for the hits are declining. This is due to higher development costs and what he refers to as a decline in software sales.
I hadn't considered the decline in software sales part, but if fewer games are made that leads to fewer choices for the consumer which leads to the consumer buying fewer titles overall then that makes sense.