As we engage a new Electronic Gaming Expo (E3), the largest video game exhibition in the world, there are many doubts floating around amongst game developers and gaming fans alike. Can the game industry continue to spend millions of dollars developing traditional console and PC games? Is it better to abandon consoles for simpler social and mobile games with larger profit margins and reduced risk? At face value, the answer to the aforementioned questions is no it can’t, and yes it is better. There is no denying the power of the smartphone revolution; it has significantly altered the perceptions of software delivery—especially when it comes to video games. Something is happening to the industry that goes beyond an outdated revenue model.

Game developers, publishers and console manufacturers need to realize that the game industry is still young and incredibly volatile. It is constantly changing and evolving due to fickle consumer demands and technological advancements. What works today for the game industry may not be so pleasing to consumers a year from now. This is a challenge that many smaller game studios going all-in on console and PC gaming have failed to overcome. Instead, previously unknown small-time game developers like Rovio and their “Angry Birds” have made a fortune in the mobile space. With much fewer risks, fewer barriers to entry and higher profit margins, mobile game development makes a lot more sense for the smaller and many times more innovative teams. They have room to experiment and come up with interesting new game concepts without risking tens of millions of dollars on one high-profile console game.

One recent example of the high-risk nature of the traditional game industry is the story of 38 Studios and their action game “Kingdoms of Amalur: Reckoning.” The game itself received fantastic reviews from the gaming press but failed to sell more than some 300,000 copies at retail. It underperformed at a time when 38 Studios desperately needed capital to stay afloat. The studio now owes the state of Rhode Island more than $100 million and as of May 24, has laid off all of its 400 employees. When one or two bad business decisions can bring down a multi-million dollar operation, something is terribly wrong. Blame the complex nature of modern game development or the impossible to satiate consumer demands, but traditional game development as we know it cannot sustain itself much longer as it is. Change needs to happen.

Nintendo had the right idea with the Wii. It is a cost effective, easy-to-develop-for game console; it has a much smaller barrier to entry for developers. Game development costs on the Wii are significantly less than either PS3 or Xbox 360 due to the Wii’s less capable innards. Some arguments could be made that the Wii helped soften the blow many game publishers faced when investing in high-cost and underperforming HD games developed for the PS3, Xbox 360 and PC. Despite all the ridicule the Wii receives for its underwhelming graphics and processing power, it is a step in the right direction for traditional gaming. Console manufacturers need to step back and see the bigger picture here: pushing the traditional game industry forward with just console horsepower alone will destroy it.

If console manufacturers do not realize that they are hindering the traditional games market by making their game systems overly complex and difficult to develop for, there won’t be much of a market left a few years from now. This is what will make E3 2012 and 2013 so interesting to watch. As Nintendo, Sony and Microsoft showcase their next-generation game consoles developers around the world will be able to gauge if investing into traditional gaming continues to make sense. From a business perspective, traditional gaming as it is now makes very little sense to the majority of game studios. We’ll soon see if Nintendo agrees.