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Game Industry Faces Adoption Challenges
The BBC reports that, while gaming continues to grow in popularity, the industry still faces numerous challenges in attracting new customers. From the article: "Although gaming is a huge industry, the report warned that turning a profit will become increasingly difficult. For players such as Microsoft, Sony and Nintendo the fact that the market is reaching saturation point coupled with the increasing costs of producing both games and consoles means profit margins may not be a big as they would like. "
First of all, you have the fact that despite the money the industry makes (income, mind you, not necessarily profit), games have a much higher average price of goods for a consumer than the other entertainment industries. Sure, there are still the bargain bin games, and a quite vibrant used market, but those cannibalize the companies' ability to exist. Essentially you have something like an average CD or DVD costing in the $15 range, while games CONSISTENTLY push the retail price up, with new next gen titles going to the $60+ range. What does that mean? Total market / higher price = smaller audience.
The fact that the game industry is essentially the largest niche market EVER seems to be lost on everyone in the industry. So, considering the price of the goods combined with a much smaller audience than movies or music, you get market volatility. A smaller trend can radically affect things.
Second, games are reaching the end of the technology curve. Games have been existing for years on the "ooo, lookie" factor. However, it's getting to the point where many of the non-professionals have a problem seeing the leap from PS2 to PS3. Sure, there will be detail, but the wow factor that was there from, say, SNES to N64 just isn't there.
Third, the rising development costs are bringing two things to light: first, developers can't cut it and are going under/being absorbed at an alarming rate (in the US at least). What that means is that there are fewer and fewer outlets for creativity and less motivation to "take risks" (as if it's somehow not risky to keep doing the same thing forever, but whatever). Second, those costs are making it more and more necessary to amortize development over multiple platforms. By doing that, companies CAN'T spend the money to fully utilize the systems, and you get generic ports that don't look as good as they could on the new hardware. That tends to exacerbate the loss of the "ooo, lookie" factor as well. How many reviews have we seen of XBox 360 games where people say they're WORSE than the previous games? Too many already. The HD/non-HD issue really threatens to mar the system if developers aren't careful.
Combine all of these things, and we wind up with a stagnant market that is heading towards a cliff. I don't think the simple alarmist reasons of the Costikyan's of the world are the whole story, but they're one part of something that's coming. I think of it as Hollywood around 1965. It's not looking good, and things are going to HAVE to change. Microsoft's recent revision that they won't hit their sales figures are the first tremor.