I've been dancing around this point and I finally made the connection over lunch: The only way PC gaming is going to compete with console gaming will be price of games. The various forms of gratis gaming and electronic distributions are just facets of the same issue, which is that PC gaming could be cheaper than console gaming.
Consoles subsidize hardware costs through software sales. Thus, the PS2 cost $300 at launch and $150 now, whereas a comparably equipped computer is at least 50% more expensive at any given time, and sometimes more. Sony is not able to provide hardware at a significantly lower cost than Dell or HP. Instead, they sell the console at a loss to encourage more people to buy games. Sony sells a license to the game publishers so Sony makes money off each game sale. Thus, we have grossly overpriced software subsidizing hardware sales. This is the same model that Microsoft and Sun have been pushing for computing in general.
Currently PC games and console games both cost $50. When faced with a choice of paying $150 for a console and $50 for each game or paying $350 for a computer and $50 for each game, most consumers make the obvious choice. However, there is no reason a company like Intel or even Apple couldn't subsidize the cost of game development, much like how Intel subsidizes Linux development through the OSDL
or like Apple how operates iTunes
as a loss leader. Both companies provide a software product for free or at a low cost in order to sell more of their other, profitable products: processors and iPods, respectively.
If PC gaming is survive in a professional capacity, some developer or developers is going to need a relationship with a sponsor. The sponsor could be HP, nVidia, or AMD. It could be anyone who has a vested interest in keeping the PC viable as a gaming platform and who also has deep pockets. The sponsor will give the game developer money to create a professionally developed game, with all the art, music, and design elements that gamers have come to expect. The sponsor will then make that game available on the Internet for free or for a nominal fee. The hardware sales will then subsidize the cost of software, not the other way around.
Gamers will benefit because the margins in the computer business are razor-thin as it is. Buying hardware near-cost and getting software for free or nearly so will be cheaper for the consumer than buying hardware under cost and getting expensive software. If games of similar quality to console games were available for the PC now for free, I could buy a $350 computer and play all the games I wanted, or buy a $150 console and four $50 games. Most consumers will opt for the PC, especially considering the PC also has email, IM, and online shopping.
It won't take a quantum leap in game design to save PC gaming like I suggested before. All it takes is a little creative financing. Before this can happen, though, a game developer and a potential sponsor need to make this leap and come to the same conclusion. We'll see if any do.