Collapse? More like an adjustment. I'm not going to bother reading Malstrom, but I'll talk about it, anyway. :P
Game development is overinvested. On game consoles the problem is that the games have grown too expensive, on iOS the problem is that the games are too abundant, on all platforms there's a problem with a lack of diversification.
The result is a very hit-driven industry, and a bunch of suits (publishers and retailers) take over and decide they know what it takes to make a hit, just as we see in other entertainment markets. The result is that games stop being made for the benefit of consumers and start being made for publishers and retailers. This is why Kickstarters pop up promising point-and-click adventures, space flight sims and isometric RPGs and raise millions of dollars. Everybody's looking for the next hit shooter, and nobody cares to serve niche markets.
But gaming isn't dying, publishing is. The necrosis is well-advanced in music and print, and video games have the advantage of having a far less established publishing industry. Publishing does three jobs: It funds, it distributes, and it markets.
Distribution is going digital, which means that job is getting done by companies like Valve, Apple, Microsoft and Nintendo.
Marketing is going social, with email, Twitter and Facebook campaigns replacing print and television ads.
And now we see funding going to the crowd with Kickstarter. This not only means that underserved markets that publishers don't care about get served. This mitigates risk by testing the market before you even make a product. If your product needs $1 million to get made and can't raise $1 million worth of interest, you know you need a new product, no need to finish production or ship a hundred thousand copies to retailers to find out.
Publishers are running out of jobs to do, which is why they have to flee upmarket where they can keep dealing with Best Buy, running TV ads, and funding $50 million developments.
"The worst part about these reviews is they are [subjective]--and their scores often depend on how drunk you got the media at a Street Fighter event." — Mona Hamilton, Capcom Senior VP of Marketing
*Image indefinitely borrowed from BrainBoxLtd without his consent.