If you find it hard to buy the software upfront, it does take away some of the initial risks, at a cost later. Some people may go for it - good for them I say.

Agreeing to a 5% royalty is pretty crazy in my opinion. If you're even planning on being able to support just a modest salary for yourself with your game sales, Unity or CryEngine are better deals. The UE license is only worth it if you plan on making less than $15,000 a year.

Neither of those give you access to the source code of the engine.

Agreed. For an example, Mass Effect 3 is a relatively recent game on the Unreal engine that sold over 1.5 million copies + DLC, probably for revenue of something like $100mil. 5% of that $100mil per successful game should be enough to keep Epic in business.

AFAIK Every AAA game pays a flat rate per game (in the 100k-500k range), not the rev share. The rev share agreement would only be for indie / non-pros.

Based on industry knowledge, the AAA flat rate game licencing costs don't seem to be going down.

One reason might be that once you have a few Unreal engine / Cryengine games under your belt, the cost to switch engines is HUGE. You're basically locked in unless you want to re-hire / re-train the majority of your programmers.

Epic is still offering other licensing structures as needed/requested for their larger clients. I'm sure if you had a game explode and start selling millions of copies they would work with you to come up with a different licensing scheme so you weren't paying them millions (plural) of dollars, but possibly some smaller set amount and a smaller royalty.