Don't get me wrong. Graphics are a key ingredient as is sound, control, playability etc but they are just small cogs in the big wheel that is gameplay.
how are we playingWell I could tell you what you want to hear or i could tell you the truth...
When Doom first came out with the pixellated graphics it set the standard then but wasn't very realistic compared to what followed. People still didn't have a problem with the suspension of disbelief part. As graphics became better over the years moving through the bits the disbeliefs of gamers have been suspended time and time again. Doom was quickly followed by Quake, Turok, Unreal, Half-Life etc each upping the ante every time. Why did these games make it big while Terminator, Killzone, Heretic, Soldier of Fortune etc didn't? It wasn't the graphics becasue graphically some of these are superior to thier more well known counterparts.
Finally the games industry is maturing to the stage where graphics do not drive the industry in the same way as before. Up until now, when a new 'next-gen' console os launched the improvement in graphics is the most touted feature, but now the whole game playing experience is being underlined as the key selling point. The decline in 'realistic' graphics has been further undermined due to the artistic nature of games now. Cell-shading is increasing in popularity and the same sort of visual effects are even spilling into mainstream films.
Some genres such as driving games will always benefit from improved graphics but they have now reached saturation point. How do you improve photo-realastic graphics? You don't. You improve the game physics, mechanics, AI etc resulting in an overall improvement in gameplay. That is what makes a game into a great one.