I do wonder if a studio that made a lot of smaller games with less technical specs but spent all the money in fun gameplay design and character design and stories would outcompete major AAA game studios.

I think I'm just describing mobile game studios pre-gachafication

I think you’re also describing the indie/lower-budget scene that does very well on Steam. There’s plenty of games that break out via streaming, for instance.

It's very interesting. I played that new-ish Marvel: Cosmic Invasion game and recently played Fight 'N Rage. I believe both are built in the exact same game engine. Fight 'N Rage, which is undoubtedly the better of the two games (although both are quite fun) had a tiny roster. I think there was a single primary developer, and then one guy did the music and maybe 1-2 other people helped with things. The Marvel game was made by a "real" studio and had tens (hundreds?) of staff to build what was effectively a slightly lower quality game. (although the Marvel game had a much smaller staff than anything like a modern AAA release.) Famously, Doom and Quake were made by quite small teams.

I don't know what the answer is, but there just seems to be unavoidable bloat all around. Staff, cost, complexity, system requirements, etc.

Isn’t this Nintendo? Pretty sure they’ve proven that you don’t need the latest in graphics (always a generation behind) to make engaging games.

What do you mean by "outcompete"? There've been some extremely successful small-studio games recently (the one that comes to mind is Silksong, which dropped last September)

this is sorta the Blumhouse model