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I think the fact that the Wii is going to own over 50% of the market this gen with vastly inferior graphics (there I said it) proves that graphics have already hit the point of deminishing returns.

Unless the games are almost indistinguishable from real life then it won't really be enough to impress people anymore and justify the cost to upgrade to a newer system. Even then Wii will likely outsell that cause only those buying HD consoles now would even notice or care.

Nintendo has shown that the industry needs to do more than just worry about graphics. I expect PS4 and Xbox720 will be merely two previous gen systems ducttaped together with some innovation control scheme.