IMHO, open source works great for workstation and everyday apps (I use FOS programs for everyday apps because its gives me a sort of guarantee that it is not spyware/bloatware), but I don't think it could work for entire video games. Components of the game engine (renderer, physics, plugins, etc), but as for the entire game being FOS, I don't think it works very well.
The best place FOS has in the video game industry is in engine plugins/libraries (sdl, openGL, openAL, freeGLUT, etc), but not the entire game itself. At least not a game that would be up to par with todays gameplay standards. Something like Pong, yeah, open source, but something like Crysis, never.