With the advent of Digital Distibution, publishing costs are being drastically reduced, but with increasing costs of development, do you think AAA can continue to exist? Is Money holding back the gaming industry? If not now, then when?

And the more pressing question, Will we expect to see a rise in retail costs as an effect of this?

AAA games can't keep existing at these budgets therefore developers are either gonna redefine the budget for AAA games or their gonna flat out not exist. Money is holding back almost everything.

See, I don't get where these large budgets are going when it comes to games development... People keep on saying that AAA development is getting so large yet we have Cod Ghosts which was basically unplayable on PC and had fps issues on console, we have BF4 was had large server issues as well as bugs and etc, we had SimCity which was again, unplayable due to server issues and other things, we have TitanFall which if a really fun game but its multiplayer only with an asking price of $60, we have FFXIII: LR which was just complete shit and the list goes on... I get the budget has increased, nearly double in some games, but where is it going into? (Obviously there are exceptions like majority of the first party games)

Game development is so large yet developers (not all) can't make a proper, playable games?

Good point. What's happening here in front of our very eyes, is much like the realestate market. No middle ground, its either high budget or indie games. That's not healthy.

Development cost only rises at the beginning of a new generation, since you are unfamiliar with new hardware and all development tools and middleware programs are not completely finished yet and leave a lot room for improvement.

My prediction is that (multiplatform) development costs in this generation will eventually be not much higher than in the last generation. Higher resolution, polygon counts and effect complexity means more art design work to be done at first but because PS4 and 360 are nearly identical in hardware (both use a PC x64 AMD APU with mostly the same features) developers will save a lot of time and effort. And as the middleware programs and game engines improve over time, more and more tasks will be automated to save time and money.

Cost can also be reduced by outsourcing a part of the work to counties like China or India which is already done by most big companies.

Pachter recently suggested that development costs actually went down a bit this gen compared to last gen.
Thanks to the simple architecture development cycles will get shorter.

That middle ground always existed, sadly it sells the worst and nobody wants it. Indie games are the only excuse for a game not to look like a AAA game.

AAA can only work with proven franchises like GTA or COD. Any new franchises can't have that sort of budget at first, it's too risky for the developer.

The mammoth AAA (GTA, COD, Titanfall, Assassin's Creed, BF, Fallout, Elder Scrolls) will still be there but mid-market AAA or AA will increasingly go away (Dead Space, Bioshock, Ninja Gaiden, Homefront, Hitman, Bulletstorm, Darksiders, Prey, Max Pain, Prince of Persia, Crisis, FEAR, Fuse, Enslaved, Rainbow 6, Lost Planet, Red Faction, Medal of Honor, Silent Hill, Bruthas in Arms, Singularity, DMC, Killzone, Wolfenstein, Mafia, Sleeping Dogs, Brink, Deus Ex, Doom, Army of 2, Quake, Resistence, Splinter Cell, Metro 2033, Tomb Raider, Dead Island, Thief, Just Cause, Kane & Lynch, Crackdown, Vanquish, Ghost Recon, Dante's Inferno, Metal Gear Revengeance, Castlevania, Prototipe, Rage).

AAA is fine. Apart from the doom of console sales, this gen should be much more lucrative than the last. Dev costs are going down and profit per sale is going up.