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As dramatic as it sounds, everything we know about the way we buy and play games is set to change forever. Scratch that. It's *changed* - but we're missing the bigger picture, or refusing to acknowledge its significance. The symptoms of a collapsing industry have shifted from whispered outliers, to a chorus of lament. Bottom line: the days of £40+ boxed games, physical shops and expensive consoles are over.

In five years or less, it's possible Sony won't be making game consoles - and its acquisition of cloud gaming service Gaikai might be a statement of intent. Traditional AAA games like Call of Duty will be 'services', not products, in much the same way you'd subscribe to Sky Sports HD. Huge back catalogues of games will be playable via cloud streaming, akin to Spotify.

Xbox 720 might not be an entertainment device like your Sky box, it will be your Sky box. FIFA won't release yearly updates, but incremental patches, running on distant servers, completely irrespective of 'console' specs or power.

It sounds far fetched, but the console market is failing. Sales are dominated by an increasingly small number of AAA titles like Call of Duty, making original games a hugely risky gamble that could sink a publisher outright due to extortionate development and marketing costs. Bottom line: there are fewer games, less risk, and less creativity.

In 2010, publisher THQ invested heavily in Red Faction Armageddon and Homefront. In 2012, THQ stood on the brink, shedding 240 jobs, as shares fell below $1. Once powerful specialist game retailer Game entered administration (Shares peaked at 300p in mid-2008, falling to 4p by Jan 2012). After months on sale, Sega's sci-fi shooter Binary Domain sold fewer copies than an average home gate for League One's Stevenage FC - yet likely cost millions to develop.

Sony reported a record annual loss of £3.6bn (38 times more than Manchester City have spent on players and wages since 2008, or 514 Cristiano Ronaldo's). Sony's ailing TV business is largely to blame, but falling hardware and game sales are a factor. From Jan 1st to mid May in 2011, 21 AAA games had sold over 50,000 boxed copies on their opening weekend. In 2012, this total is just four.

Falling game sales threaten the existing console model, where platform holders subsidise the hardware costs, and make the money back on 'long tail' game sales and licensing costs. If people no longer buy £40+ games in volume, that business falls down.

"It takes billions of dollars to create a console and you have to milk it for five to seven years (with game sales) to get your money back," explains free-to-play shooter Firefall creator and former World of Warcraft lead Mark Kern. Sony sold PS3's for £425 at the 2006 UK launch, but the console cost £600 to produce - so each sale *cost* Sony almost £200.

"I think the model is broken", says Kern, "You keep making these bigger and bigger bets and that forces you to play it safer. And if you play it safer with your gameplay, people will get tired of the crap you're serving. When that happens, they get bored and they'll leave. And you haven't fostered any of the middle ground innovation and new ideas that you need to tap into next. "So something has to change. Consoles, I believe, are dead."

Game sales are dominated by a handful of AAA releases and sequels. The top five PS3 and 360 games - Modern Warfare 3, FIFA 12, Skyrim, Battlefield 3 and Assassin's Creed Brotherhood - accounted for over 8 million of the 20 million PS3 / 360 games sold last year, 40% of the entire market. 'Middle-core' or AA games, like Dead Rising, Vanquish, Bayonetta, Red Faction, and Ratchet and Clank, are left scrapping for a dwindling market share - yet still cost hundreds of thousands, or more, to produce.

"There's no middle ground", says Kern. "You're either an indie game or you're a massive AAA, IP-backed sequel with derivative gameplay, as it's the only safe bet you can make when you're spending hundreds of millions of dollars. All the games in the middle have been squeezed out and we've seen all these independent studios get closed down."

Over the last year, developer closures include Bizarre Creations, Black Rock, 3D Realms, Codemasters Guildford, Factor 5, Grin, Hudson, Kaos, Juice Games, Propaganda Games, RealTime Worlds, Shaba Games and EA Bright Light. Fewer developers mean fewer games and fewer, risk-averse, publishers - and fewer original £40 boxed games.

Risk and innovation now belongs on PSN or XBLA, with download-only games, like Journey, Flower, Fez and The Unfinished Swan. Yet critical hits like Journey only exist due to large subsidies from Sony, looking to create brand equity for PS3 as the home of 'original' games, even if they make a loss. Journey is PSN's fastest selling game of all time, but Sony won't release sales figures.

The riskiest stuff, redolent of the mad £1.99-2.99 Spectrum 48k cassette games of the 1980s (Rockstar Ate My Hamster, anyone?), now exist on iPad, iPhone, Android, Facebook and web browsers, not to mention full-blown PC free-to-play titles. "The model is transitioning away from these big boxed games where you're pouring hundreds of millions of dollars into a title, to these sorts of games that don't count on the distributor," notes Kern.

A key signifier of the shift in power - or rather, money - from AAA games, to social or free-to-play games is the movement of key staff. Ex-EA COO John Schappert recently left the publishing giant to join social games firm Zynga (of Facebook Farmville fame). "Traditional games have become more (hard)core," notes Schappert.

"They require an expensive console, use a controller which laymen are afraid of, and their interfaces are not always the easiest to use. People are buying fewer games and playing them longer. A lot of players are stretched for time - they don't have two hours, they have fifteen minutes and don't want to spend money."

EA are acutely aware of ageing audiences for console games - a recent ESA survey suggested the average US gamer was 37 years old. Older, savvy, gamers crave complexity, but for newcomers, getting to grips with John Madden NHL 12 is like learning an alien language. EA need to stop selling complex products to an ageing audience, and find a way to target younger fans.

That's the real battle - time. Or rather, value. Sega's Vanquish is arguably this generation's finest third person shooter, but costs £40 for six hours of solo-play, with limited replay value (at £7 ish an hour). Solo-player RPG Skyrim offers 200 hours of value at the same price (at £0.20 per hour). FIFA and Call of Duty are primarily online games, existing almost as a service -literally in the case of Call of Duty: Elite.

Even the 30 hour Mass Effect 3 throws in a deep, persistent XP, multiplayer mode to keep you locked in its universe, spending your money on DLC ammo and weapon packs, rather than taking risks on new £40 IP.

Look around, and 'new' models are being tested everywhere. In Feb 2012, Sony decided to give away the multiplayer component of PS3 Killzone for free via PSN. Well, until you reach Sergeant 1 rank, and need to pay $15 for the full version, with XP bonuses, clan modes and more.

CCP's free-to-play PS3 shooter Dust 514 launches this year, which directly interacts with PC players - with the option to buy non-essential, but advantageous, weapon and skill packs. It's a classic PC freemium model, like League of Legends or Valve's Team Fortress 2, which makes more money through micro payments now it's free, than when they sold the full game up front.

Microsoft is selling a $99 Xbox 360, that requires you to sign up to Xbox Live Gold for $15 over two years, just like a mobile phone contract. It'll shift Xbox 360s, sure, but is more likely a test for Xbox 720, where reducing the initial cost of the console will be essential, given that game sales are no longer a 'long tail' guarantee.

Our sources suggest Xbox 720 won't just work in tandem with Sky TV, but allow your TV aerial to be plugged directly into the console. Given the mobile phone-style cost model, what's to stop it literally *being* your Sky box? Sky currently HD base units are made by Amstrad, but it'd be an easy way to gain traction in the games market. Unwittingly, *everyone* who joins Sky for Live Premier League, Mad Men or The Food Channel, would possess a box capable of running Halo 5.

With Apple rumoured to launch a TV set by Xmas 2012, likely with iTunes, iPad and iPhone compatibility; plus its world of apps, services and content, the traditional console manufacturers will be under increasing pressure. If Apple added console-quality, cloud-streamed games to that mix, PS4 or Xbox 720 would struggle to compete.

Consoles, as we know them, are dead. But great console-style games aren't. The change is in how we play, consume and purchase them. Expect a future of phone-style hardware subscriptions, fuss-free set top boxes, huge free-to-play games (with micro payment DLC components), AAA subscription services (Call of Duty etc), and cloud-based back catalogues.

With Gaikai, you might eventually be able to play the *entire* PlayStation library, in the same way you search for songs on Spotify. It'd certainly negate the need to put backward compatible chips in PS4. That is, if PS4 even exists as a physical product. PlayStation might become a premium gaming *channel*, delivered through other means.

It's quite possible that nothing significant changes about the way we buy and play games for a year or two - and PS4 might even look like the console(s) we know today - but the old models are on borrowed time.

In early 2012, we spoke to BioShock creator Ken Levine, who was very reluctant to make next-gen predictions. He did, however, say something we initially dismissed as enigmatic madness, that might be the wisest thing he said. "People mistake the past for the present and they also mistake the present for the future", claims Levine, "People are very slow to realise that the thing they're doing, or the world they're living in is changing, or if the model they're working under is no longer viable."

We love console gaming, but its 'death' is key to the industry's long-term health. Our desire for great gaming isn't going anyway, even if the way we consume might be unrecognisable. Video games have died - and come back stronger - at least once already. In 1983, the video game market was worth $3.2bn, but fell a staggering 97% to $100m by 1985.

During this period, Atari were rumoured to have buried millions of unsold ET cartridges in the New Mexico desert. 29 years later, as another financial and existential crisis looms, we don't think videogames are finished just yet.