All it would take is one free software project to produce a good 3D engine (and it is possible - look at the Linux kernel, Firefox, KDE, GNOME or X.Org) and that would no longer be a problem. No one would have to code another 3D engine - the reason HD games take so long is because they spend the first few years of development duplicating what others have done by making their own 3D engine because the licensing cost of the existing ones is so high.

I have a housemate who is considering buying a 360.Fully chipped and with loads of games all for free. And he claims he likes gaming, just seems he wants the gaming industry to fail so he can play games more.

He must want Microsoft to fail in the game industry and he has chosen to mod chip his console.

I agree. I just think the best way to end piracy is to do that. That doesn't mean I want it to happen.

What I do want to happen (but it won't) is free software games. That means free as in freedom. That would stop piracy too.

That would kill gaming pretty fast too..

Last I checked when I go to the grocerie store to buy food they make me pay and I'm pretty sure it's the same for people working in gaming companies..

And that's why Linux, Firefox, GNOME, KDE, X.Org, OpenOffice.org and all similar projects failed long ago, right?

Maybe it's just he hates M$...you never know. Although recommendations to try and talk him out of it are welcome. Then again he has loose morals about that already, he has enough Copied movies and talks about upgrading out cable broadband illegaly a lot.

The engine isn't a huge part of the budget.  In fact, for any studio that just licenses their engine it's a very small part of the budget.

I really don't think that will give people the incentive to be game developers then.  You can't assume people will be willing to buy in game content or that companies will want to advertise in game (especially if economic times are tight).  You will get the hardcore crowd that will be willing to do it, but will developement cycles be shorter, longer, or the same as current developement times? Nintendo, M$, and Sony would not make any consoles, and there would be no point in pushing technology for games.

All the open source projects you listed are great examples of free software that have worked, but if games were free,  we would not see the same amount of games that we have right now and the same quality.

Steam has only been partically hacked. Any multiplayer elements are basically screwed over due to Valve's anti-cheat client. If you pirated a steam game you can play non-VAC servers but there aren't many.