From what I've read, software development for the PS3 / XBox360 is costing around 15-20 million while the older generation and the Wii development is around 3-4 million. I've seen that quoted in a few places, although I don't recall the original source (one was from a developer, though).

But I don't get it.

If it costs 12-16 million more to make a game, then developers have to have that much more income to offset the expense. But the games are only $10 more. If that means an addition $10 profit per game, then the game would have to sell 1.2 to 1.6 million MORE copies than normal just to break even.

From a business perspective, this makes no sense at all to develop for the PS3/XBox360 because it requires a higher sales rate from an installed userbase that is too low to get that kind of sales rate.

Assuming Sony/Microsoft cut another $10 from licensing, allowing a total of $20 additional profit per game, that still is 600K to 800K more copies that have to be sold just to break even.

What am I missing? All I can figure is that the development houses really aren't spending as much developing these new gen games vs old gen as they are claiming. Now, maybe this is just a strawman that I've set up -- so if my facts are wrong, please let me know.

IF a dev spends 15,000,000 dolars on a game total gross expenses. (Including packaging shipping, paying employees advertising ect...) and a game costs $60 it's simple math.
15,000,000 divided by 60 is the total number of units they need to sell to break even. which is 250,000. at 20Million that number becomes 333 Thousand.

They may have to sell more than a Wii game but most games can easily sell 250,000 no matter how crappy.

rasone77 - not ever dollar from a game sale goes to the dev's though, so those numbers would have to be higher. 

 For a last gen game the numbers for a console game to break even are about 800,00-1,000,000.  In order for those higher budget games of this generation, they will have to sell many more.  I have the numbers of what a quality game for last gen costs, just not on me at the moment.  After work if I'm still thinking about I can find that info.

Yup, there are many other expenses including licensing fees, tariffs, marketing, distribution, retail, etc.

Devs don't receive the $60 from each game sale. They receive more like $15. Publishers get a larger percentage. So they need to sell a million games to break even on a 15 million dollar game.

I approached this from a relative standpoint. I figure 3-4 million in expenses is going to break even at some X number of games sold and that X must be pretty low or else it wouldn't be worth the risk.

So if the game costs an additional 12-16 million, then the number of games sold at $10 more profit (difference between the $50 and $60 game, assuming all $10 goes to the developer) would have to be X+1200000 just to cover those additional expenses. That's what not making sense to me. The developers must be making more than just $10 additional profit to account for the added expense--or they aren't really spending that much.

Yes, simple math. Except the developers don't get anywhere near $60 from that $60 sale. The retail store gets some, the publisher gets some, the console licenser gets some (Sony/Nintendo/Microsoft), etc. So the developer will get between $10 and $15 on a full price game.

Of course, selling a million copies of a game is extremely difficult to do. Only a handful of games have done so on the 360 and even fewer on the Wii so far. In both cases, it's a relatively small percentage.

Also, it is worth noting that Sony has the highest licensing fees and also the most costly console to develop for. So profits are more elusive on the PS3 than the other consoles, although it's pretty clear to see that the Wii will be the easiest to turn a profit on.

NOT correct.  250,000 is a number that only a small percentage of games reach. 

 Those fees are very apparent when you look at how many games a high quality PC must sale to make money: about 600,000 as opposed to the 800,000-1,000,000 a console game must sale.

I think this is a bad sign for the gaming world. If a software company wants to make a large profit, they follow the Nintendo example: make cheap and easy games with low R&D costs, low development costs and short development times. The casual market love games like this, they aren't demanding, they want fun, interesting and easy games that involve them.

for the Xbox 360 and PS3 consoles, games need to be visually stunning, on the cutting edge of technology to capture the interests of their markets. Their markets demand intuitive, visually stunning games with a high degree of development. this costs big bucks, and the returns will be lower.

Does that mean developers are going to shun the Xbox360/PS3 markets and stop pushing the boundaries of software/gaming development in favour of the 'casual market'...

being an increasingly hardcore gamer who loves the visually stunning developments of PS3 and 360, i fear for the future of console gaming...