I can't believe no one mentioned this, but the biggest factor is piracy. Several publishers have mentioned this explicitly.
It is not lack of technology. Just go to TomsHardware and check out the GPU charts. The $100-$250 price ranges have doubled performance over the past two years. Not 30%, not 50%, but DOUBLED(there is a temporary shortage on several cards due to low processor yields that has led to a temporary spike in prices).
Many PC players who know how to install a GPU also know how to torrent and crack games. Several Polls in 2009 estimate PC piracy rates to be between 80 and 95%.
Now compare that to the number of modded consoles.
There were what, about 1 million XBOX360 consoles banned from XBOX Live for piracy in Nov. I'm not sure what the percentage of 360 owners are on Live, but even if its only 60% of the 31million 360s, that would be 1 in 18, or under 6%.
Thats a HUGE difference from PC, and developers are well aware of this.
So, in order to cover costs, many devs have decided to make a game for PC only if they can make it for console as well, which of course brings the overall graphical quality down to the lowest common denominator, aka X360/PS3.
The very slow adoption rate of Vista, and subsequently DX10/DX10.1 haven't helped matters either.
My crossfired 5050's could take Unchated 2 and apply insane AA, AF, tesselate the models, apply other post processing effects and the game would play beautifully, IF it were designed for PC.
Many people played Cysis, few paid for it.
Devs have lost incentive to put lots of money into graphics for PC exclusives.
There are several methods being tried right now to curb piracy that aren't as harmful as starforce and related bogus software, such as requiring you to be logged in live in order to play a game.
As much as this pi$$es me off, I understand that I will not see avant garde titles like Oblivion and Crysis again until devs are sure that they will make money off of their title.
But that's just like, my opinion, man.
cybrcatter
While it's true that piracy is rampant on PC, I don't really think that's the whole issue. Fact of the matter is that the majority of people obtain their media legally. This is true for music, movies, computer applications, and it's true for games. I also have to really question the 85% to 90% piracy quote. If that were true PC game sales should be barely scrounging up numbers, not selling the millions of copies that they currently do. For example Crysis has sold millions of copies. I find it very hard to believe that it could have sold 9x more if it wasn't for piracy. You want to know the reason Crysis didn't fly off the shelves? Because the system requirements were so damn high that when it was released even a person with a $5,000 rig couldn't get it to run all settings maxed at a high resolution. But even then it still managed to sell 1 million copies in its first three months on the market which is very good considering how few people could run it back then.
The big reason why consoles get favored over the PC by developers is because the console market is MUCH bigger than the PC market. Your average gamer these days is a casual one. They have no interest in owning more than one console, much less owning a $2000 gaming PC. They also do not have the technical know-how to put together a gaming PC or fix the myriad technical issues that pop up on an extremely common basis when playing games on the PC. God only knows how many many games I've installed on my system where I had to spend hours on google and forums trying to figure out why the game wouldn't play, I couldn't get sound, why I was getting microstuttering, lag, etc. A normal person is not going to have the patience or technical expertise to deal with all of that.
You'll notice that back in the 90's gaming was mostly a niche hobby for nerds and geeks. Those types of people are more likely to own gaming computers, and as a result PC gaming was a major market back then relative to consoles. However, starting with this decade we saw a shift in consumer demographics from geeks and nerds to frat boys and jocks. Console sales exploded as did sales of FPS and sports games. As a result, the focus of the industry shifted to exploit those new trends. Coincidentally this is also one of the reasons why we've seen creativity in games all but bottom out in the industry (the other factor being development costs).
tl;dr: Piracy isn't to blame, the massive differences between the install bases of consoles and PCs is.
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