MMORPGS have the wrong business model, they make money!

I was interested in this article about MMORPGS having the wrong business model, from Wagner James Au on GigaOm, talking about Scott Jennings' views:

To fix the online gaming model, Jennings said some innovative thinking is required. “Embracing open source development, crowd-sourcing content, targeting different platforms such as the Web or mobile phones, all of these are valid,” he suggested. With few exceptions, however, game publishers have been unwilling to take risks. “They aren’t responding to the changing market because they don’t understand how to work things like web technologies into their current income models,” he said. “So instead they keep doing the same things– just more of them, and with higher budgets.”

Jennings points to the ballooning costs of MMORPGs — World of Warcraft is estimated to have cost $40 million to $50 million to develop, and while Age of Conan cost just $25 million, the game is having retention issues, largely because the budget wasn’t big enough, he says. By contrast, he notes, small companies produce low-budget web-based MMOs like Club Penguin and RuneScape that post far higher profits.

I see the argument about lowering cost of production, but it seems to me there is an inherent contradiction here - if its an arms race to bigger budgets and blockbuster productions, how come Runescape etc are profitable? There are similar arms races in other entertainment industries, but there are also limits to the economics of the arms race. Also, its not yet clear that UGC etc is the answer, or a different industry in itself. Most (all?) entertainment industry is a power law game (ie Long Tailed), so there will always be an arms race no matter what.

Also, what does one replace it with - more Free services chasing the same Ad revenues? That doesn't seem like a step forward.....but we will have to find out when we read the eventual history of MMORPGS to know for sure, I guess.