Modern video games began in the arcades. In the many games where the player faced off against a computer opponent, the designers had a good rationale for killing the player off as often as was possible without driving them away: every time the player died he had to put more money in the machine if he wanted to play more. Death meant profit. If you play some early arcade and 8-bit games these days the big thing you notice is that you die all the time. Those things are damn near impossible. Looking back I wonder if my 8-year old self was a masochist.
When home game consoles came along, player death lost its raison d'etre: since the player put all his money in up front, there was no direct economic incentive to murder the player over and over. However, player death can be a cornerstone of good game design if the game uses death for effectively, because failure is an excellent teaching tool. Death is the stick the game's designer beats you with in order to teach you the rules of the game. Through forcing you to repeat sections of the game over until you master the mechanics of the game world, death can serve as an incentive to pay attention to the details of the game's structure-- the way enemies behave, the way the game's controls work, and so on.
The Ninja Gaiden series of 3-d action games, created by the designer Tomonobu Itagaki, both use and misuse player death. On one hand, the games' fun emerges from the series' preposterous difficulty. Deviating from many other games in the genre, Itagaki chose to make the common-variety enemy encounter (squads of ninjas) potentially deadly. Even a small number of enemies can kill you if you are not careful. This produces a satisfying level of tension throughout and also forces the player to master the game's intricate combat system to survive. (Unlike many other character action games, you cannot get through normal enemy encounters by mashing buttons.) This basic design choice was a genius move on Itagaki's part.
On the other hand, the latest installment of the game also frequently kills you for no reason, compelling you to repeat difficult passages and encounters. Learning to play a game should not be a matter of guessing how many fingers the designer is holding behind his back. At one point, you have a pretty difficult fight against a volcano/armadillo hybrid (don't ask); after you succeed in killing it, it explodes and kills you. Nothing in the game up to this point leads you to expect this, and so you are forced to repeat a long and frustrating battle. The minutes I spent re-fighting that fucking armadillo are precious moments of my life that I will never get back. Needless player death is bad on its own, but it is especially egregious when it forces you to repeat battles that you've spent long stretches of time trying to overcome, and this occurs several times.
The Ninja Gaiden games really illustrate the use and abuse of death in games. If games are ever to gain some broad appeal they will have to overcome their outmoded love of needlessly humiliating the player. There's no money in it anymore.