The game development company I worked for until a few months ago was bought out in early 2007, at a valuation that was far below the total value of the developm

The game development company I worked for until a few months ago was bought out in early 2007, at a valuation that was far below the total value of the development contracts it was doing. I'd estimate the valuation to have been about a third or quarter of yearly revenue, although I had nothing to do with the financial side or the acquisition, so I might be somewhat off. Basically, there seems to be very little confidence that most game companies will ever be sustainably profitable. It's the hit-drivenness and therefore riskiness of the business that's discouraging everyone from investing. There is a slow trend towards smaller development budgets, but it's certainly not coming from within the existing players, profitable or not. (let's face it, having ~70 people work on one project for 2½ years is pretty insane if you have no idea whether anyone will even like it)