Development costs will drop once the industry drops the archaic model for game development and move to something more efficient.
Studio heads are very clever people, publishers have their own CTOs, and so on. These people are more aware of these issues than most of us are and they've already been looking into the possible solutions for years. They're not sticking to existing practices because of stupidity, laziness or a lack of an open mind. There's a realm of problems from technical through artistic to legal that keep studios from sharing stuff to the level that you'd expect them to do.
There no reason why the vast majority of art content creation has to be done in-house when the vast majority of art content creation isn't and doesn't have to be specially unique.
It has to be unique for a lot of reasons. Each game, even those using the same engine, have very different subsystems for animation, shaders, lighting, and so on. You can't just simply exchange characters between Gears and Mass Effect even though they're supposedly both using UE3.
Moving assets between MGS, UC, KZ, COD, and so on would involve redoing almost everything from scratch, except maybe the high res source art (but even that is completely different between various studios).
Even games like GT5, Blur and Forza are using completely different material and shader systems, physical models, texture and poly budgets and so on. Deferred rendering or forward rendering, 30 fps or 60fps, HDR or LDR, number of cars... these are all very important factors in determining poly and texture budgets and shader complexities. So it's just as impossible to reuse even the car model geometry between these games.
There is not enough development specialization when it comes to game companies. A company that specializes in animation and services dozens upon dozens of gaming projects would reduce animation costs while able to forward animation as a whole at a much faster pace than a bunch of individual dev houses all mostly operating independently of each other.
There are a lot of such companies but it's always very very complicated. Animation is completely tied to the pipeline of not only the given engine but also the entire studio. Gears used standard 3ds max bipeds at a time AFAIK, now they're also using Maya for facial animations; Mass Effect uses 3ds max with custom bones and rigging, even though both have data in UE3 formats in the end.
For example we specialize in CG cinematics, along with Blur, Plastic Wax, Axis, and a few others. The result is that today only Square and Blizzard have their internal teams and everyone else has pretty much stopped maintaining CG departments. It's a lot easier to outsource this kind of work because there's a lot less to sync (nothing we do goes into the game engine), and it's a small contained piece that's easy to lock down early on and requires relatively limited data exchange.
But we've done contract work for Heavenly Sword and The Club characters, and character animation for another title, and it's always been waaaay more complicated, despite a far smaller scale and a lot less people involved in the project.
And besides, outsourcing in itself is an incredibly complex issue, covering stuff like communication, feedback loops, constant technology updates and synchronization, education, art direction... We've outsourced some stuff and on average it takes twice as long to produce the same assets, even though we have very few technical restrictions compared to a game. Takes a lot more time from lead artists who can't focus on their more important tasks, requires a lot of extra legal and HR work (contracts, NDAs, money transfers) and so on.
