Western developers are stuck. Stuck in a self-perpetuating reality that every game must be graphically superior, bigger, 'badder' than the last. Instead of focusing on simply making new fun experiences. New experiences are a little risky, yes but can be done an a small budget and reap large profits even with modest sales (World of Goo).
But instead they 'reduce risk' but essentually making the same games over and over with slightly different features and better graphics at greater and greater expense and lower and lower profit margins. Dependance on online is also a factor. Sure it works great for Halo & CoD but for modestly successful games the additional cost of hosting online servers eats away at the profit margin.
It's a classic case of the snake eating it's own tail. They created a generation of graphic crazed online gaming whores (no offense) who are ever increasingly difficult to impress. Look at GoDIII. Why are people disappointed?? Expectations are ridiculously high. Look at Killzone 2. How much $$$$ are they pumping into the graphics so it can at least live up to the expectations they themselves created. If gameplay suffers because all the $$ went to graphics then it's doomed irregardless.
I don't think the industry is going to die. But I do think we are watching the beginning of the downfall of the graphic powerful realistic violent game genre.
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