Better hardware is necessary for certain things, like better lighting, larger areas, more detail in environments, characters, more characters on screen, etc. and there does need to be a bare minimum of hardware to create functional engaging games but those aren't necessarily required to make a great game or a great experience. If a game has better lighting than another it doesn't make that game better, it just means that game has better lighting.
In my opinion what makes a game great is the experience of it and the experience you have of it. How it feels from moment to moment, how the control feels, how immersive the game is, the attention to detail to the game reality and the consistency of that reality, the believability of the world and the characters, the dialogue/script, the pacing/flow, directing, music, etc. most if that isn't really dependent on the level of hardware or graphics, it's dependent on the game's director, storytellers, writers, etc.
I believe that photo realistic graphics aren't necessary for a great game experience, because if the game is made well, with care, empathy, attention to detail to the experience of the game, we'll believe in it regardless of how it looks(to a certain degree). A good example would be Pixar and how all the characters are either toys, animals, or really deformed humans yet we still believe in them when we watch the film, we get immersed and empathize for them. How many live action films have you seen where it's like the real people don't really feel like people at all? We can't relate to them, connect to them, they seem artificial, they don't react properly or believable to the world they're in. But technically shouldn't they feel more real and relatable than anything from a Pixar film?
To me games like Final Fantasy 4, 6, Chrono Trigger, GTA III+SA, Ocarina of Time, etc. demonstrated that you don't need amazing graphics or sound to create an incredible game experience, believable characters or world. You need good writers, a good empathetic director, and a focus on the experience/feel of the game. Our brains actually don't need much to go on to start believing in worlds, stories, etc. This is one of the reasons why I'm really fond of Nintendo because this is what they focus on when creating their games, it's about the core experience, the feeling of the game and immersion. People always say "but it's the same damn game again and again lol". It's not, it's a totally different/new experience. It doesn't matter if this game or that game has better graphics or new characters if the experience is not created well and the game itself is not immersive then it has failed.
I'm all for better hardware but I'm not obsessed with it and don't believe it's necessary to create good games. There's no need to lose billions of dollars just to get some better polygons 2 years sooner than you would have anyways. Eye Candy is fun but it won't make a bad game good. It also doesn't make all games on the system with better hardware superior to all games with weaker hardware. Sometimes I feel like it's a marketing gimmick designed to entice people "Look at the graphics, this game must be better because the graphics are better." even though the experience could be weak and hollow. It also seems like companies can get away with just improving graphics instead of creating better experiences.
