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I'm in the "not necessary, but nice to have" camp on this matter. The Wii is definitely fine with just the DVD, heck Twilight Princess was massive, and it fit on a Gamecube disc. There are so many awesomely massive and massively awesome games on the PS2 and Xbox, that I just wish the Wii would get more of them. =P

With the 360 and PS3, space might very well become an issue, since all games on them are required to be in HD, and they support that higher sound standard as well (is it required btw?). All that requires much more space than older technology, and while a good developer will know how to go around such problems, not having the problems allow them to do something they otherwise couldn't. Let's be honest here: While I don't think there is anything on the PS3 so far that wouldn't run on the Wii if the eye-candy was cut back, there are going to be some games that really makes us go OMGWTFBBQ and would never run on Nintendo's little white box, just like there are going to be games on the Wii so weird that nobody would dare make them with the development fees of the PS3.

I suppose it's a bit contradictory, as I generally support Nintendo's "use old tech to do something new" approach, but at same time I really want to see what happens when Sony give a shitload of money to the guys who made Shadow of the Colossus so awesome on the PS2, and tell them to make whatever they want on the PS3. I just hope the huge losses Sony are making doesn't force them to cut back on great niche games that don't sell well, like Ico and SotC. ;_;

All those nice things being said, I think the limiting factor that has made so many great recent games short (Gears, Heavenly, Uncharted, CoD4 etc) is the sheer expense of making HD graphics, rather than disc space. The developer of Gran Turismo has said that it took them 1 man-day to make a car on the PS1 version, 30 on the PS2, and 180 on the PS3. The attention to detail in GT (as racing games in general) is probably way higher than in most games, but if this is any indicator of what the ratio of time needed on the different systems, then I'm just slightly worried.

The really famous exclusive games that everyone has labeled AAA+++ years before their release will probably be pretty epic, but I'm worried of how large risks 3rd parties will be willing to make when it requires so great sales to make a decent profit. Now I don't know all that much about this, but I believe that if MS and Sony would've stayed with SD, or even "just" 720p graphics, then producing content to games wouldn't cost so damn much, and we'd be playing much better games in general.

This is also one of the reasons I like Nintendo a lot nowadays, but to be honest there is probably a feedback loop of "likes Nintendo -> thinks SD graphics are a good idea -> like Nintendo..." going on in my head right now. =P