This is not a thread where I want to talk about economical troubles we're facing. I don't want to talk about old games being better than new ones either - not strictly at least. What I want to discuss about is how videogames got a very, very strange direction lately. It's a lenghty one but I hope you have the patience to read this...
From the first games to, say, 2006, we have seen an increasing try to go towards realism - where a spaceship used to be a few pixels, now it's a thousands of polygons representation of the reality (or fantasy) - we are less and less needed to imagine what the objects are, as they more and more resemble reality.
I once had the theory that when graphics will reach realism, they will go OVER realism, adding effects that don't exist, or not in this amount - more lights, more shadows, and so on, creating a "more real than real" experience. However, in around 2006, things changed. Far from being fully realistic, games decided it's time to spam with effects, caring less and less of the gameplay quality. Doom 3 and Half Life 2 were techdemos, but 2 amazing games were behind them. Bioshock? Gears Of War? Looks aside, these newer hits don't have innovations, nor they are much better than other similar games - but they put in TONS of motion blur, shadows and such, creating an illusion of a world that SHOULD be realistic but in reality it looks made in wax. And to make room for the effects, less gameplay options and shorter storyline are required.
Let's get 2 examples of driving games:
- Need For Speed series. Most Wanted (2005) looks amazing, and mixes the big city with the cops, a much needed thing. The graphics and gameplay were great. Undercover (2008) has a lot more effects and the same core gameplay, but they totally ruined everything, and the excessive trying to put the most effects they can made so that the game is actually UGLIER than Most Wanted, requiring A LOT better PC too (with struggling framerate even on consoles).
- Race Driver series. 3 (2006) features a stunning amount of racing series and a very realistic graphics engine, with a fairly realistic driving too. GRID (2008) puts in tons of unwanted effects (such as motion blur), and cuts out the variety along with the driving pleasure. The result? The 2006 installment LOOKS BETTER and FEELS BETTER.
As I said, to add these annoying effects, they cut out tons of features - and not just that. Lots of companies don't care to optimize their games, which often lag on consoles, let alone on PCs that could EASILY handle them if they were made well. They have less and less time to do these kind of stuff because they spend too much time optimizing the graphics (Duke Nukem Forever anyone?).
So, what if graphics stopped at 2006 level? Sure, Crysis looks hella good, but it has things such as motion blur everywhere - that is IN NO WAY realistic, why adding it? It really feels like today's games are here to show us how the core gameplay and graphics stayed intact for the past years, and they only added extra lighting effects with more motion blur (FlatOut 2 -> FlatOut: Ultimate Carnage is a good example of that).
All hail the good old games then? Discuss.

This industry has grown at an explosive rate, and as a result the pure amount of copy-cats and derivative games has made the most drudgingly pathetic games appear creative.
Fallout 3 for example, age old RPG staples piled into a single game with nerfed SPECIAL from an old RPG series, somehow critics already believe the game has reinvigorated the genre. With what? Redundant devices that have existed ever since Ultima IV?
Hell, I think the fact that no game has possessed a karmic system so extensive and complex as Ultima IV's since that game was released in the 80s is certain proof that very few development companies can produce any sort of unique system that goes beyond being a mere gimmick.

Have to agree with Eyenixon...
I would say that the graphics is a diminishing returns business, the more "realistic" you make one aspect, the more other aspects look wrong by comparison. (which is why all the bloom effects and so on look out-of-place).
But more importantly, the games industry has taken what the movie industry does best, and then trumped them. I'm talking bandwagon fever. You get one or two successful titles in a particular theme, then they decide it needs endless sequels and copycat games.
I guess I was spoilt by growing up in the 80s and 90s where there was such a lot of innovation across the board, I can't help but think of each new game, "thats like game X from 1997" or whatever.

Motion blur annoys you but having seen it in some games I quite like it and it does add a little it of something to the usual visual mix.
Realistsic physic or altered physics, HT&L, life like or simplified cartoons, weather patterns, sound, better backgounds all of it adds to the experience and as the procesing power get bigger the more that developers will stay and play with these effects to immerse us in ever more detail, be it realistic or not.
It wasn't that long ago that a big thing was made of voice sync. Games are always evolving but in increasingly small details. The big bits have been done, now is the age of the tiny nuances that give the wow factor.

I think companies should stop worrying about the graphics so damn much and just focus on the story and tight code. I get tired of having a slide show from a game that is NOT an FPS (Neverwinter Nights 2 I am looking at you with your sloppy Aurora engine). Graphics don't need to evolve anymore so to speak. The story and gameplay, on the other hand, does. If you want a concrete example of graphics trumping gameplay just play Oblivion ,which, oddly enough ,runs better than Neverwinter Nights 2 on my PC) for a few hours.

I am suddenly reminded of this strip from VG Cats.

well dawn of war 2 and sins of a solar empire are trying different things with empire total war adding alot of new features (though naval battle look similar to imperial glory's)

Toss out the story as well, it's the focus on trying to deliver a cinematic experience that has caused so many developers to remove the "hassles" of complex gameplay.

Careful that you don't throw out the baby with the bathwater... I like a good story. I agree that its the "Cinematic experience" that is the problem... Mass Effect being a case in point. I don't play games to watch a film, it distances you from what you're doing, which is the opposite of what games are supposed to be about... the interactivity.
Such things were handled better before the push for better 3D graphics and voice acting.

most games today seemingly fit into a handful of categories, and all play like one another more or less, with a few variants.
there is the odd original game, but they usually fail. And since those games aren't profitable, most companies don't follow suit

Well, for me, the only game that achieved graphical realism was STALKER - all the other games either didn't have sufficient technology (old ones) or tried TOO hard (new ones).
As for better graphics affecting gameplay: Of course, resources are used up in making pretty effects (which don't even look good - totally useless HDR that made rocks shine and eat up performance is a great example of that... Or, for more generalised graphic 'feel' - did you notice Red Alert 3 actually looks best on lowest settings, maybe excluding effects?). But I think we'll get to the point where all games will look the same - and it'll be originality that'll count. In fact, I guess we're almost there...

Nothing wrong with a good story, but it should never be the focus, or even a focus in tandem with gameplay.
Much like the graphics, the sound, or any other factor that doesn't directly deal with the mechanics of gameplay, the story just isn't that important, it may improve the overall experience of the game but once it becomes the focus then developers tend to build the game around the plot rather than constructing something that focuses on the fine points of gameplay.
It's like the difference between Fallout 1 and Fallout 3's treatment of NPCs, Fallout 3 says "No you can't kill this NPC because he's part of the story! He dies when we say so!", while Fallout 1 simply says "Go ahead and kill him, but it's going to bite you in the ass."
Instead of just being some arbitrary event in the course of a storyline, the death of that NPC in Fallout 1 would be like the death of any other NPC and as a result it will be the player's decision and not that of the developer's scripting.

I don't have an issue with game play vs story restrictions, as long as it is consistent. That said, I do like a story focused experience, even if the game ends up like a 'talking book' as the result.
Mind you, I also like many other methods to completion. So I guess it's down to what the aim of the result is.

iuno I thought Puzzle Quest was pretty cool.

I will second that! And if you have it on the PSP then it becomes *portable* crack.