That's a very good way to put it and quite insightful I believe.

First of all, your analogy has to be one of the worst analogies I've ever seen. Ever. It deserves awards for not being remotely relevant.  A working analogy would be two car companies are selling cars.  Car company A sells 1 million cars a year at a loss. Car company B sells 500,000 cars a year at a profit.  Ten years later, none of those 1 million cars exist anymore, and car company A is out of business. Car company B's 500,000 cars are still selling though, and will continue to do so in the future. As the only car company remaining, they either get the business of company A, or the industry shrinks.  Either way their sales are not affected. The investors who invested in car company A went bankrupt, and the company is gone.  The investors who invested in car company B made money over a period of time, and are financially stable. 

That is the current state of the games industry. 

Also, Sega is a great example... of what's happening to western developers.  You want to see what happened to Sega spend a few minutes looking through their financial statements, and look at the sales of their big HD games.  There's a reason they aren't making many HD games anymore...

@ psrock: Links about Japanese developers not making as good of games or as innovative of games or using technology to its advantage are 100% meaningless.  We aren't talking about what they're making, we're talking about if they have a sustainable business model, which they do.

i wonder how sega wii games will sell

You could take PS2 to PS3 as an example. Sony got massive revenue from PS2 but in developing for PS3 that added up to lots of expenses. Why? Sony tried too put too much too quickly. Some people agreed that PS3 should have waited for one more year to be released (this would have been market share suicide in my opinion) but still time is the factor here.

Everything just advanced too much not just graphical advancement (which takes loads of money to develop) but features too. As other posts have said, you need those shiny hot real-life graphics to even be noticed in this gen (xbox and PS3 mainly of course) but people want more. Technical advancement is too much (AI and physics for hundreds of enemies), everything in a game is too complicated, features like achievements for everything and huge multi-player. Things are just going to cost more and more along with each advancement.

But time is the factor, Sony could have waited until hardware parts are cheaper like game companies could have waited until getting into top-end technologies is cheaper. What if next-gen Xbox has a console that allows for many more features in games and close to real-life graphics- Companies would need to develop for that and the costs might be staggering.

the problem is Nintendo is so great at it, it will take these guys years to get close to ninty standards.


And the biggest obstacle : the gaming press and the internet.

Look at all the whining about the God of wAR trailer. The focus wasnt how insane the gameplay was, but how bad the graphic was.

Yeah, it wasn't made to be completely relevant. It was meant to be vaguely relevant. But if half of your argument is going to be how much my analogy sucked, you could have made it a footnote instead. I could easily argue how poor your analogy is as well. If we're arguing car sales in proportion to software sales, there are a lot more factors involved than just the sales of the car/game. Electronic Arts sells more software than Activision most weeks, but EA is losing tons of money whereas Activision is making tons. A lot of this comes down to the profit being made by each game, not how much the games are selling. If Activision can sell millions of copies of Guitar Hero World Tour, and every version makes them a good profit margin, they're certainly doing better than Rock Band or EA's budget priced games.

Sega didn't find success on the HD platforms. Some of this is bad luck, but a lot of it is a complete failure to understand the demographics of those two systems. The highest selling Sega game on the PS3 is Virtua Fighter 5. While 500k is respectable, it likely wasn't enough for a profit. This is Sega's fault for releasing one of the most Japanese oriented fighters on a platform that is struggling in Japan (though, to be fair, they probably began development before the PS3 launch). The highest selling Sega game on the 360 (not counting the bundled Sega Superstars Tennis) is Sonic the Hedgehog, which sold a million copies (if European sales were updated). Pretty good sales, especialy when Sonic is stronger on Nintendo platforms and the game itself was mediocre. Sega found tons of success on the Gamecube last generation, and that was the weakest system on the market. Condemned 2 sold over a million combined on the HD platforms, which is a great improvement over the first game's sales of .45 million (on the other hand, it was a 360 launch title and the second one had lots of advertising).

If so then good riddance. Maybe the shovelware and endless deluge of uninspired sequels would stop and Microsoft and Sony would possibly adopt more sustainable business practices once the market recovers.

Mee to.

Most of your arguments are good, especially Naznatips'. But I still think you're concentrating too much on high development costs instead of thinking about milking franchises too. Remember what we heard about High Voltage's search for a publisher. Everyone wanted to get the game out as fast as possible in order to make some money, instead of taking enough time to polish it and make it a huge seller.
Remember also that EA apparently is stopping their Need for Speed series which was a huge seller only one gen ago, but it's overdone now. Now add high development costs to franchises that are not selling as well as expected anymore and to others that are not popular yet and a mentality to get a game out in time no matter how bad it is and you get the reason why western publishers are struggling.

They're struggling but they're not dead yet.
I won't repeat what I already said I expect to happen given their behaviour, but this thread just sets a milestone.
And I say good riddance too if they die, they'll have only themselves to blame.