Explosions, football matches, car races that take over whole cities – nothing is too much for the men (and yes, they are almost all men) creating the next generation of video games.

They cost millions of pounds to make and are part of an industry that's worth tens of billions. They win Baftas, employ some of the most talented writers, designers and artists, and are enjoyed by people of all ages across the globe. Video games may once have been deemed something that only teenage boys were interested in, but now they are big business and they're taking on the film industry in terms of creativity and sales. Gerhard Florin, head of international publishing at Electronic Arts, one of the biggest games publishers in the world, explains: "Games entertainment is part of mainstream life. It's no longer niche. Games reach masses of people."

When the seminal game Pong was released in 1972, it became the world's first mega-selling video game. Graphically, it involved two moving lines and a dot. Creating it was a simple matter of one man and his mainframe computer – back then the size of the average flat. But today's hyper-real racing games, spot-on flight simulations and high-calibre battle zones are altogether more complicated to make and much, much more expensive. A game can cost from £500,000 to more than £10m to develop, and since only 10 per cent of the thousands of games that are released each year turn a profit, it becomes clear that the people who give games life have a hell of a job on their hands.

Project Gotham Racing 4 is the latest in the best-selling series of street-driving games. Known for its faithful recreation of the world's most famous racetracks, cities and high performance cars, the PGR franchise on the Xbox and Xbox 360 consoles has made millions of pounds and is considered to be one of the best in the business. One of the reasons gamers are still flocking to buy a game that's in its fourth incarnation is that the game's developers, Bizarre Creations, can skillfully create an incredibly accurate racing experience. So, how do they do it?

The development process, which took over two-and-a-half years, began with an atlas and some airline tickets. "The first thing we do is to choose which cities to set races in – making sure they are recognisable, including the 'perfume bottle' cities like New York and Paris," explains Ged Talbot, lead designer at Bizarre Creations, a Liverpool-based games studio. "We give possible locations a recce, go there and walk round them for a few days and decide whether we want to include a place or not." What Talbot and his art team are looking for aren't postcard-perfect views – they're searching for details that turn a city centre into a challenging race track. "We make sure they've got some kind of great feature, like a jump or narrow roads, something that's going to appeal to the people who will play the game rather than just recreating beautiful streets."

Once a location has been chosen to appear in the finished game, the hard work begins. "We take about 30,000 to 40,000 photos per city [there are 10 cities in the game] and we'll take pictures of every building on both sides of the road for the entire city," says Talbot. "Then we'll have to take pictures of the lampposts, because every city has different lampposts. Bins, railings – every city has details like that that are slightly different from anywhere else. We even take pictures of the Tarmac to get the colour right, and all the road markings – even if we change them in the game, we need to have a record of the original road markings. We have to take pictures of the whole city, including the sky, to capture the ambience." It took Talbot's team of between four and six people 14 days per city to get the detailed photographs they required, then it was back to the studios to move on to the next stage of the game's development, creating a digital framework on which to place the images.

"We make the buildings from wireframe models and a lot of that is done using maps. We'll get maps from the various cities – we ask the city officials and they provide us with really quite detailed maps that include topography and the scale of buildings. That's the first part: creating blocks that are the shape of buildings. Then we'll take the photographs and clean them up because we can't stop people walking past our cameras or stop cars from driving past. A huge part of it is taking every image and removing shadows and lighting problems. Finally, the pictures will be placed on the side of the block."

After the game's race tracks have been created in this way, the designers turn their attentions to the real stars of PGR4 – the cars. " We've got a really good relationship with the car manufacturers," says Talbot. "Although they don't give us their cars to drive – despite the fact that I've been on at them for years to let me have a go – they do give us detailed images of the cars. Sometimes, for example with the Ferrari F40, we'll hire the car and take pictures of the interior and the exterior."

The part that Talbot is most proud of is the Nürburgring race track. Based on the legendary track in Germany, just driving the virtual version of what racing enthusiasts call the "green hell" or "the ring" is a nerve-racking experience. In real life, any driver can pay to tackle this 13.6 mile loop of road when it's open, but fatal accidents are a regular occurrence. Talbot went to the track twice while working on the game – once to photograph it and once to race on it. "When we took the photos, I went round at about five miles an hour," Despite his skill piloting a Ferrari around the track's multiple curves in the game, he is less gung-ho in real life. "People die on the ring all the time – I reckon it's safer to just play the game." When the time came for him to race around the ring for real, fog halted his progress and closed the track. It's more than a little ironic given that one of the stand-out features of PGR4 is the weather conditions, which have been designed not only to look like the real thing, but also to affect how the cars perform in the game.

A whole team of designers is dedicated to effects in the game and they are the ones who create realistic rain, fog and ice. Talbot says that this level of detail is the most marked difference between today's games and the ones he worked on when he joined the company eight years ago. "In the past, we've been able to get away with something that looks quite like a Formula One car. Now that car not only has to look exactly like a Formula One car, it needs to throw off the right amount of dust when the car slows done. It needs to have fire coming out of the back. The suspension needs to work exactly right. As the technology gets better, the smaller details become more important. That's really the biggest difference in how what we do has changed. It's the fidelity and the resolution of everything that's gone sky high."

If there's one man who knows about things going sky high, it's Thomas Bengtsson, a 3D effects artist who specialises in creating explosions for games. Although this job might sound like something of a niche role, his expertise fits well with the broad range of skills that a games developer needs. According to Nick Burton, senior programmer at the games development company Rare, "game development has one of the most diverse skills requirement of all modern media, ranging from mathematics and physics to acting and architecture". Bengtsson most recently worked on World in Conflict, a PC war game in which he created impressively realistic nuclear explosions. "I do a lot of research and tests to try to find out new ways to make effects," he says. "When I worked on World in Conflict, there was a huge amount of different explosions, units and buildings that were needed to get unique effects. First, you research, to find reference material to create a realistic game. Then it's basically a matter of drawing and animating textures for particles [the units used to make up the images] and then we have a special person who specifies how those particles are going to behave in the game." To make explosions that are as realistic as possible, he spends his time studying real-life examples. "I have an archive of different references of explosions that I use as inspiration. It's pretty funny how many videos there are that cover explosions, and we probably have the majority of them right here in the office."

Meanwhile, in a top floor office in Surrey, a teamof games designers has spent months working on a title that's light years away from the painstaking detail and high fidelity of PGR4 or World in Conflict. Kuju Entertainment, a European games company, has been developing a game that started out as a mini-game within one of the original Project Gotham games. Geometry Wars, a game that resembles an old school arcade games of 20 years ago, is considered by many gamers to be a perfect example of how a simple concept can become an incredibly enjoyable game. Players pilot a geometric " ship " trapped in a grid world, facing off against waves of enemies – the aim is simply to survive long enough to gain a high score. After proving popular as a game within a game, it was launched as a downloadable title on the Xbox Live Arcade. Kuju was tasked earlier this year with turning the game into a stand-alone title – Geometry Wars: Galaxies – for Nintendo's Wii and DS consoles.

"One of the joys about working on Geometry Wars is the fact that it doesn't require the huge amount of accurate details that a lot of modern games do," explains Jim Mummery, senior games designer at Kuju Entertainment. "We weren't held back by animation times – we purely had to worry about what plays well. Not having to care about anything other than making an enjoyable game is very freeing."

But while the 12-man team at Kuju (yes, most games creators are men) enjoyed making a game free from the exhaustive details of a title like PGR4, developing the game was anything but simple. Roger Carpenter, a senior producer at Sierra Entertainment, the publishers of the game, explains just how tight the schedule for developing a game can be. "Geometry Wars took seven months to make from beginning to end. This is an extraordinarily short time. Some games can be in development for four years, and in those cases there's a lot of research and feedback going on. Anything from 12 to 18 months is the norm."

Despite the punishing time frame, the development of Geometry Wars: Galaxies has followed the standard template for how almost every video game is made. First comes pitching the idea for the game: is it a franchise or an existing "intellectual property"? Games based on existing properties or IPs as they are known – think sequels like Halo 3, FIFA Soccer 08 or any of the games based on Harry Potter films – tend to be more popular with games publishers because they're seen as a safe investment.

"The hardest thing is creating a new IP because you have to persuade publishers to spend their money on an unknown quantity," explains Mummery. If the pitch is successful, the developers put together a games design document explaining every element of what they want the game to involve. Storyboards are drawn up and characters are designed by the art team. Then the game's environments – or the "game worlds" – start being created. "The designers will use a 3D package to create a template that is then adapted by artists," says Mummery. " Basically, the designers make the building blocks and the artists make it look good." Then, according to Mummery, the real work starts. " It's the coders who make everything come together."

Generally, coders are given a bad press and accused of being long-haired geeks with no social skills and even less personal hygiene. Slurs aside, without them there would be no video games and it's their hard work that forms the bedrock on which the designers and artists can build. "The coding is predominantly the most time-consuming part of making any game," says Carpenter.

Fortunately, David Ream, Kuju's senior software engineer, is nothing like the unsavoury stereotype of a coder. Personable and enthusiastic, he explains that "on the technical side, we strip down the ideas and we have to bring it down to what's possible. What you don't put in is as important as what you do." While gamers never see the code, it's what makes all of the elements of the game work together. Code is the computer language instructions that control every aspect of the game and a 3D code engine is used to generate the complex code needed for all of the shadows and textures that can be seen on screen.

Before the game is completed, it's Quality Assurance – or QA – time. QA is vital for picking up any bugs or flaws that could ruin a game for its players. "In every game there's a huge testing process and the publisher will hire a company with a lot of people who'll play the game to death," says Mummery. "Games are chucked at people all over the world and every game goes through hundreds of people before it is released." The bigger the game, the more time and money is spent on testing it. Before Halo 3, a game that made £75m in its first week of sale, launched in September, testers played the game in mocked-up rooms while the game's developers watched them to see what aspects of the game they struggled with. While testing games might sound like a dream job, you'd be mistaken. "I used to do QA," says Mummery, sighing. "But the reality is that you get bored of games very quickly, and slog through them. People always say 'Oh, you play games for a living', but they don't see the hours we work."

The run up to the game's deadline is called "crunch time" and it's when developers work all hours to make sure the game is delivered glitch-free. Things can get tense in the race to the finish line. "With a tight project like this, the schedule comes first. But with any big title there will be a lot of discussions between lead programmers and designers on what should and shouldn't go in," says Mummery. "People fight tooth and nail but as a result, that conflict can bring out the best in a game."

When the dust has settled and the game is finished, the marketing machine takes over to hype games to the rafters. A game that costs around £2m to make can have a promotions budget worth five times that.

But by this time, the developers are already working on the next big thing. "When your game comes out, obviously you want it to be well received," says Mummery. "But by the time it's on the shelf, you're working on something else." So while gamers are immersing themselves in a virtual world, the designers are already busy creating the next one.

Game on! 10 classics that broke the mould

Pong (1972, arcade)

The world's first hugely popular arcade video game came with the instructions: "avoid missing ball for high score".

Pac-Man (1980, arcade)

Although developed in Japan, it was America, already obsessed with Space Invaders (1978), that went for Pac-Man in a big way. The game's "holy grail" – eating all the dots, power pellets and ghosts without losing a life – was achieved in only 1999.

Super Mario Bros (1985, Nintendo Entertainment System)

Listed in the Guinness Book of Records as the biggest-selling video game in history – more than 40m copies have been sold since its launch – Nintendo's scrolling adventure marked a new era of platform games.

Civilization (1991, PC)

Created by Sid Meier, one of gaming's grand overlords, Civilization gave its players the chance to play God by creating their own world and managing it from 4000BC through to AD2000. A bench-mark in intelligent gaming.

Doom (1993, PC)

Ultra-violent but incredibly immersive, Doom was a huge leap forward in terms of every aspect of gameplay and made PC gaming big news.

Tomb Raider (1996, PSOne)

The first cyber superstar, Lara Croft, changed the face – and body – of video gaming. Her assets helped boost sales of PlayStation while the game was truly genre-defining.

Half-Life (1998, PC)

A first-person shooter that broke all the genre's rules, Half-Life marked the birth of groundbreaking story-led gaming and impressive AI.

World of Warcraft (2004, PC)

MMORPGs – massive multiplayer online roleplay games – may have existed before World of Warcraft's launch, but WoW is considered to be the biggest and best.

Guitar Hero (2005, PlayStation 2)

Thanks to an innovative guitar-shaped controller and a series of rocking tunes, Guitar Hero quickly became a best-seller, accurately recreating the feeling of playing a real guitar.

Wii Sports (2006, Wii)

Nintendo's Wii console marked a new era in social gaming. Wii Sports, the game that came in a bundle with the console, saw players using realistic movements to go bowling, play tennis and try to hit a hole in one.