A large number of titles are a wash, from the profits/loss perspective. I'd say that the 20% that turn a decent profit just barely make up for the 50% that show a small loss (or worse). The mega-hits make a HUGE difference in this model. One megahit's profits can offset an entire quarter of 10-20 projects posting a loss.
Games development houses sprout up like weeds (every schmo thinks they know how to make the world's greatest videogame), and flop like pancakes (not very many groups of people can actually pull off making a good videogame), for the same reasons.
A good half (or more) games projects never seen the light of day... or the neon light of the store shelf, as it were. Publishers can projects like crazy when they get worried. In my experience, the canning of projects isn't always well thought out. They often happen after mergers or acquisitions, due to tax benefits, and are often based on very high-level broad market analysis and trends. The games industry is run by businessmen, not artists, and certainly not gamers.
