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Saxon said: I know the arguments about small developers, big business killing fresh ideas and community participation. However, you can find free games of similar or better quality on the net. Some are community built, others are just people who felt like putting their invention on the net.
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This is one of the key aspects of the problem. Writing and art have the same problem on a larger scale; there are enough people who are willing to produce new material for free that it's difficult to make a living in the field.
I doubt there are very many publishers who deliberately decide "this game is good enough that it doesn't need high quality graphics". Most publishers use the best graphics they can afford. You'll occaisionally see a calculated decision to use a "retro" style because it fits the theme of the game, but I don't see that happening very often. There seems to me to be a lot more publishers who think impressive graphics can compensate for weak gameplay.
I don't think the business model is the problem; the problem is worrying that anybody who strays from the herd and doesn't do things the same way as everyone else is going to fail. I don't see any indications that Shrapnel is in financial trouble; their business model seems to be working for them, and that's all that really matters.