Exclusive titles like Gears of War have helped Xbox 360 sales

The report by media analysts Screen Digest said that the complexity of next generation games made it hard for publishers to cover production costs.

Long development times and large production teams also affected profitability, the report found.

Sequels to popular games or those based on films are now the focus, it added.

The report models sales forecasts for next generation games until 2010.

Its author Ed Barton told the BBC News website that many games publishers were choosing to release the same game across as many different hardware platforms as possible to access the widest possible user base.

Exclusive deal

But while some publishers seek to spread their games appeal across many platforms, at least one hardware manufacturer is basing its strategy on exclusivity.

Sony has scaled up its own internal development resource, basically becoming one of the largest makers of gaming content on the planet

Ed Barton, Screen Digest

Microsoft has adopted a policy of forging relationships with third party publishers to produce games exclusively for the Xbox 360, a strategy which may involve making financial assurances to publishers.

"It's hard to see how anyone would commercially agree to that without a relatively substantial payment to mitigate the risk of that game being only on a single platform," said Mr Barton.

However, it seems the strategy is beginning to pay off with the success of exclusive titles like Epic's Gears of War for Xbox 360.

Sony's strategy is based on the belief that sales of consoles are based on the number and quality games available for the hardware.

"Sony has scaled up its own internal development resource, basically becoming one of the largest makers of gaming content on the planet," said Mr Barton.

Sony now employs more than 2,000 development staff across 14 studios worldwide.

With the Wii Nintendo is focusing on game play innovation to attract a wider range of consumers, a strategy which has proved very successful for the company's handheld DS platform, said Mr Barton.

Some industry figures believe that despite mounting costs, games publishers who can adapt to changes in the market will not only survive, but flourish.

Paul Jackson, the head of the UK's Entertainment and Leisure Software Publishers Association (Elspa), said games publishers are under threat "only if they are not ready to move up a gear".

"The UK is a very successful place to be a games producer," said Mr Jackson.

"We have come out of every technology change stronger and I don't anticipate this transition to be any different."