I strongly feel that the quest for better graphics are taking the industry backwards. The problem with 'realistic' graphics is that it requires ridicolous amounts of processing power, a meaningless amount of extra graphics work, and takes away resources from designing a good game concept. The end result are games that look terrible and in most cases are useless itterations of a game idea that's been done hundreds of times before.
A 'realistic' looking game that tries to represent the physical world faithfully will always fail. They fail hard today, and they still will in 50 years if people still try to chase down that rabit hole. If you ever go outside, take a moment to look around and really observe the world. The level of detail is infinite and it will never be possible to replicate. The closer people get the more unnatural the graphics look. Something as basic as a running human for example, no game has come close to showing this realistically. Games that get compared to the physical world will always look horrible.
In contrast, a game like Super Mario Brothers looks fantastic. Since it is set in an imaginary cartoon world, there is no perfect reference point and stylized graphics can be made to accurately represent ideas and environments.
Even worse, the graphics craze is driving up development costs to the point where it limits creativity. Gaming is quickly heading down the path of Hollywood where big budget movies are so expensive no one comes up with an idea anymore. It's all about reuse of popular concepts and add as much visual flair as possible. Avatar is a perfect example, hailed as a great miovie when it really is mediocre at best. In its day The Matrix was the same. All presentation, no substance.
So far this generation Nintendo is the company that has done the most to ebb this flow. Not by creating an 'underpowered' console, though that has had some effect, but through initiatives like Wii Ware and DSi Ware.
I am usually an optimist, but the future of videogaming looks bleak to me.
