The problem is not that that Free Software can't be profitable, but that the direction the market takes when development of the product is decentralized is unpredictable. Also, the benefits to the industry as a whole (and in turn, any particular large game company that advocates Free Software) would not be immediately visible. Free Software is a radical proposition in a world full of people that hate to share, so it's difficult to convince large companies to take the initial necessary steps to foster an industry for it. Risk is the bane of sustained profit. It was much easier to get this movement off the ground for computers because it was mostly just unpaid volunteers that liked to write unique, useful software and share it, and the corporations like IBM, Sun, and Novell only began to chime in when the foundation was well in place. The patented nature of game consoles means that change has to come from the top down, and that's a much more difficult thing to achieve.
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