Meh, Horror does epic scale extremely well. Indeed the sheer scale of things is what makes the whole "Lovecraftian" school of horror so effective, something which tends to be large in scope with people leading expeditions, and visiting parallel dimensions. Hellraiser, which got pretty cheezy after a while is another good example, especially when you look at the second movie where they actually visit hell. While Barker had nothing to do with the movies after the first, it is noteworthy that his works in writing seem to involve a shared universe where the same expansive mythology fits into a lot of the things he writes. The whole "D'amore" character which featured in the horrendous "Lord Of Illusions" movie is actually a recurring protaganist of some of his stories.
Action, fantasy, and horror have always kind of intertwined and interbred, and with a video game you have to expect there to generally be some action, which also makes sense in most horrorific situations. Like it or not humans are predators, we fight, we kill, we dominate. It's something we're going to try and do, and avoiding this is a mistake a lot of horror makes.
What made early survival horror titles effective was that they presented options, multiple avenues of solving problems, something which developers today tind to find anathema to their design sensibilities. Today you rarely see a game where you have an option to shoot your way through a problem, or stealthily avoid it, or develop your own combination of both techniques. Such games do exist, but even so, they generally seem to vastly favor one approach over the other (such as with Deus Ex, or Dishonored where your basically punished through more limited character development if nothing else if you actually adopt a combative approach).
The early survival horror games created an enviroment where shooting/clubbing your way through enemies was always an option, but limited resources meant that it was a losing strategy if that's all you did, thus you had to carefully manage what you did, and where, and even once the game progressed and your pile of resources increased the game was good at making you want to hoard what you had, and stop to think "is it really worth the bullets to shoot my way past these guys"?
The problem with games like "Dead Space" (before even getting into the financial aspects which ensured I will not buy DS 3) and the later "Resident Evil" games is a general lack of options. Sure there might be some jump out scares, but for the most part your sheparded from one combat arena to another, and you always have enough bullets/weapons to progress, though the game DOES encourage you to shoot well with what it gives you, but in both cases you generally have inherant options (effective melee, or Issac's Telekinesis device that throws items and monster parts) to fall back on. You really can't avoid/run away from/sneak past monsters anymore. In Resident Evil or Dead Space I'm pretty much exterminating everything and anything that gets between me and my goal. If I die, it's because I didn't shoot well enough, not because I made the wrong choices, or got paticularly scared by overwhelming odds, everything seems perfectly reachable and doable.
There is also the issue of the gaming industry not really wanting to do real horror any more. Today they create scary monsters for you to fight, and then label it horror, science fiction, or fantasy depending on what market they want to go after, with little or no differance.
Horror by definition involves taking people outside of their comfort zones. When your dealing with a visual medium like video games or movies this generally involves showing people the kinds of things that inherantly want to make them recoil in real life. Not everyone enjoys horror for this reason, and most people that do, tend to appreciate it more in retrospect than anything. The rules involved like "no harming children, no overt sex, no graphic torture, etc..." all contribute to ensuring that horror games will never genuinely become horror as those rules exist to prevent games from going outside of a very politically correct safety zone.
Truthfully I feel video games, horror games in paticular, died when the industry refused to fight against people like Hillary Clinton during the whole "Hot Coffee" thing. An "M" rated game should be able to go as far as an "R" rated movie, but the industry generally does not push for it's rights, and tries not to make waves. Most "M" rated games barely hit the level of what a "T" (or PG-PG-13) rating allows. When someone like me talks about things that would make a good horror game, people oftentimes go "well, they would get an AO rating and only be able to sell through porn download sites" and the answer to that is that no they wouldn't, if they bothered to fight. You start looking at the more extreme horror movies, erotic thrillers, etc... that release as "R" or unrated (which carries the same basic thing for all intents and purposes).
To put things into perspective, the "Saw" movies are actually relatively tame compared to some of the things that have been released under the label of "extreme horror" over the years. Whether your a fan of so called "torture porn" or not the bottom line is that "Saw" even as far as it went created some truely F@cked up scenarios, and visuals, with people talking about them for years afterwards, and fueling what was it? 7 movies. I personally attributed the relative success of "Saw" not due to it being an incredibly good series, but due to it being one of the few horror movie series that actually seemed to remember they could try and make a horror movie (if only they had better writers). Crap that twisted, as opposed to just implications of it, or the remnants of things that have happened, is pretty much what you should find in your typical horror game. Finding some corpse covered in barbed wire stuffed into a bathroom stall in "Silent Hill" for example gets bloody passe after a while, especially when it lacks any real context. In a game like "Silent Hill" you should have a mother dealing with guilt over a miscarriage or abortion find a baby on a meathook, only to have it start writing and struggling as they get closer, or being forced to watch the still living anastetic-free autopsy of their current five year old daugher (complete with begging and screaming) before finding out it was an illusion. That's the kind of F@cked up crap you should be seeing in these kinds of games calling themselves horror... disgusting? Wrong? That's the entire point.
To be entirely honest I've never especially thought the Necromorphs (including the exploding babies) ever really went anywhere paticularly special. To be honest they aren't visually any worse than the monsters in some of the more surreal action games like "God Of War", "Devil May Cry", or "Darksiders", none of which were really making pretensions of being horror. I'll also say that I think "Mass Effect", the original, was more of a sci-fi horror game than Dead Space ever thought of being due to one paticular scene at the beginning where they showed the Reaperization of a bunch of New Eden colonists on the giant "Dragons Teeth" spikes. A scene I might add you never saw repeted to my memory or followed up on to any extent... that right there was probably more intense than anything we ever saw from the Necromorphs transforming people in the Dead Space games as far as I remember.
