Okay, if you have any real interest in Survival Horror, here is what you need to know:
#1. The biggest problem with Survival horror is an industry that is not willing to push the envelope far enough to do what they need to do. Horror in general is all about pushing people beyond the limits of their personal comfort. Most people by definition do not enjoy this, even retroactively, which is why horror is a niche genere in any form of media and has been under constant fire from people who just do not get it (read up on say the UK "Video Nasties" list from the 1980s). When your dealing with people who are hardcore horror fans, they by definition become jaded and need to be pushed further than relatively normal sorts to get the same results, products that are by definition aimed at horror fans thus have to constantly be moving forward in terms of intensity.
Psychological horror by definition does not really work with the serious horror fan, because if you just run into wierd stuff that is unsettling to the everyman, it's going to be shrugged off as "expected" by the person used to the genere. Stuff that doesn't make sense and is never explained is going to be viewed as a cop out, and really any kind of explanation to stuff that is just "creepy" is probably not going to deliver on the stuff that a real horror fan already thought up... and really their thought processes aren't building up dread, so much as going down a checklist of cliques and even alternative stuff they have already experienced.
Most of the people involved in talking about survival horror are people who have played a lot of games in the genere, and thus become so jaded that the stuff that might be scary to a relative "virgin" to the genere has no real effect. When it comes to something like Resident Evil 6 or whatever number they are up to now, is that most people playing it played the last 5 games, or at least a few of them, have seen it all because they don't add in anything to really screw with those people's comfort factor.
With "Silent Hill" they kind of lost the series after the first one because they started becoming too concerned about offending people to really progress the series. For a VERY long time I refused to buy Silent Hill 2 (and I eventually got a copy used because I refuse to give the company money for that title) because when they released the demo they actually censored the games due to complaints over all of the skinless children getting bludgeoned to death. I do not support censorship, but the point is that once they showed the willingness to consider people's comfort factor, especially people in the mainstream when dealing with a niche title, they destroy the entire thing. It is utterly amazing that they managed to turn Silent Hill 2 into a success (and a big one) and carry it on for one more game, but in the end the problem with Silent Hill is that they stopped doing anything to move forward because they set a clear limit as to what they were willing to do. Things got formulaistic, we know the monsters, we know the setting, and we know the general progression of events because they keep doing the same things. If say "Downpour" was your first game of it's sort you would probably see things a lot differantly, but really at this point anyone who buys survival horror is not going to be playing their first game of this sort at this point.
One thing I will also point out is that guys like "Steven King" tend to sell so well because they really aren't horror, at least not anymore. His famous technique for psychological horror and not spelling many things out and letting the reader do all the work, makes his work inoffensive and doesn't push many people's buttons. Hence, he tends to be mostly be scorned by serious horror fans nowadays, but well liked by more casual and mainstream readers who do not want to have their limits pushed by their fiction.
#2. I tend to think that survival horror also seems to have problems with budget and planning. Right now it seems like most horror games are dialing it in compared to other productions. The effort put into say "Downpour" seems to be many degrees less than say "Mass Effect". It's not difficult to understand why given the niche audience, but at the same time it does show.
#3. Connected sort of to point #1 and #2 there is no real issue with the idea of having heavily armed and capable protaganists in horror, being able to achieve the same effect as a traditional one is a matter of writing. Good example of this would be say "Jericho" or say the movie "Aliens" which managed to be freaky and definatly horrorfic while having some very deadly protaganists. Indeed part of the whole point of "Aliens" (the movie) was how bad the situation got given the sheer power of the marines. That got turned into an action video game franchise, but the movie itself, especially the first time you saw it, was not the same.
Basically you need someone who knows how to WRITE very descriptive horror to create the concepts at the very least, combined with good designers. Jericho had "Clive Barker" behind it to create the scenario, lore, and ideas, it was just bad game designers that kind of dragged it down. Get someone like him, or say splatterpunk writers like "Edward Lee" to do a game, and then put a good team on it, and you'll see a good game, and it won't matter how action-like the game is, it's going to hit all the buttons and leave no doubts it's a horror game.
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In parting I wanted to also give a correction about Silent Hill, ever tried to leave the town? Ever notice you can't do it... the roads just kind of end into mist. That's an aspect that isn't played up in most of the games so people don't think of it. I was kind of impressed how the "Silent Hill" movie, for all that it did wrong, made that point.
If they actually focused on the effects of a protaganist like the guy from "Downpour" or "Origins" trying to do the common sense thing, and finding out they can't leave, the simple motive of escape can be a driving force for the story.... a point that isn't explored so really you don't see a pressing reason for these characters to be there, the characters don't seem concerned about not being able to leave, so the players tend to forget about it. Basically they need writers who know what the frak they are doing.
See, the classic gimmick of not being able to leave is a big part of horror. The door of the old manor house slamming shut and not opening under any circumstances is one of the driving forces to the classic haunted house scenario, and why the guys in the story don't just leave.