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There would be zero motivation to try making a game like a new Wave Race or Pilotwings or something. Why spend development resources there when you could just make a Mario RPG or something?

That's what would happen in reality. They'd only make the same 8 or 9 franchises and that's it.

As a hardware maker they're forced to make a more variety of games even when they know certain games are not going to be big sellers because they need variety on the hardware.

Remove that and they have no incentive to work on anything but their main IP.

See also: SEGA.