We've been able to have games that include drawings of people for a long time. There are plenty of H-games made in Japan; most are Visual Novels. You can get English versions of some of them, but they aren't exactly flying off the shelves, as far as I know.
Part of the problem is that video games tend to be included in the Animation Age Ghetto and are also subject to censorship. Apple won't approve porn apps for the App Store, and good luck getting Nintendo or Sony to allow you to make a porn game for one of their platforms. Governments, too, get into the act.
And if you're making a porn game, you're still competing with all those other people making very cheap video porn, as well as those sites giving it away for free with wanton disregard of copyright laws.
Here's some more data on the eroge situation in Japan:
Summary:
Written from the perspective of an industry insider.
Era 1:The PC-98XX series of computer's success, despite its inadequacies in processing power and special features had erotic games (Eroge) on floppy disks contributing to its success. (Note: He may be overstating its influence, but the (super?)majority of PC games sold in Japan are eroge, the PC game market is so abysmal that Fallout 3 had to get a fantranslation). For the most part, the eroge just consisted of go to gi...