My turn :}
First, understand that I am NOT a fanboy for any particular company. I've always made my choice on what console to buy based upon what it offered compared to the others. As such, I've NEVER owned the same company's console from one generation to the next (so far). And, I've based my purchases on what games I wanted to play, not just because they were "prettier" than the other company's graphics.
Okay, with that out of the way, I have to say (bluntly) than the biggest problem for the graphics side of things from the previous generation of consoles (XBOX, PS2, GC) to the "next gen" (at least the XBOX 360/PS3) is that there just wasn't THAT much difference between them. Stick with me a minute here. Consider the point that historically from one generation of consoles to the next you would not have been able to play the SAME game on the previous generation console as on the next gen one. However, with this generational jump (XBOX - 360, PS2 - PS3), you could STILL play some of the same games on the previous generation as the "next gen" system (button press for button press identical in some games). For example, just look at Kong on XBOX and XBOX 360, or any of the other titles that came out on previous and next gen systems that offered nothing more than graphical upgrades. That's not to say the "next gen" versions weren't "prettier", but, that was all they offered in the way of difference. And, for games that were sequals/etc. of previously released games, many of them came across as just "prettier" versions of the originals/previous ones that didn't really change things in the gameplay dept either (then again, how many sequals do...lol).
In any case, if "gameplay is the thing", then some people see/saw little point to make the "next gen" investment (based solely on graphics) when they could still play the SAME games on what they have now. There NEEDS to be a generational leap that cannot be made from the previous console to the next one (i.e. a "reason", beyond just graphics, for people to say they want/need/can justify the expense of making the jump). Each console NEEDS that one title (or several for some people), which cannot be played on the previous gen system, that makes gamers stand up, take notice and say they MUST own that game (and console it's on). While that type of game may be different for different types of gamers (think FPS vs RPG vs Sports fans/etc.), there still NEEDS to be those types of games offered so people have a reason (or can justify the expense) to buy a next gen console.
So, how does this fit in with the Nintendo wii, admittedly not the powerhouse in the graphics dept when compared to the XBOX 360 and PS3? Nintendo looked at what could be done graphically nowadays and realized that something ELSE needed to change. The WAY people play the games is something that hasn't changed in a good while. Sure, it was a risk, BUT, Nintendo realized that their competition would be fighting their next gen war on the graphics battleground. Rather than jump into that fight, they flanked em and focused on changing HOW people play...smart (even thou risky) move.
By not having to focus on such high priced tech for the graphics of their system, they were able to keep the price down. Again, another smart move in these economic times (which no matter WHAT the news/politicians keep trying to say, is NOT as good as they try to make it out to be...just look at home foreclosure rates for a clue on that one). In any case, Nintendo realized they could not (or didn't want to) duke it out on the graphics end of things and decided to use their GameBoy philosophy with their next console. Even if it's not as "advanced" as their competition, make it FUN to play at a "fair" (attainable) price.
As far as graphics go, and I know this is going to sound strange coming from someone who has done and now teaches graphics, I have to admit that I like/enjoy some of the older games graphics BETTER than some of these newer games coming out on the next gen systems (at least XBOX 360 and PS3). Sure, many of them do look very pretty. But, for all their attempts as making things look more realistic, they have (at least in some areas) gone overboard and reached a point of hyper-realism. Some of the graphics look SO sharp, that it appears as if they entire screen went thru a Photoshop sharpening and/or edge enhancement filter. While that's not EVERY next gen game, enough of them (at least many of the ones being used in stores to showcase the consoles) do have it that I've noticed it fairly often.
Another side effect of graphics getting more "realistic" (even occuring in the previous generation of consoles) is that sometimes things (enemies/objectives/points of interest/etc.) become harder to find within the game environments. This can become/lead to frustrating the game player when they are unable to locate something they are supposed to. An example of this I've seen in some games too often is when the player will have to "hunt" around for an enemy AI in the environment while that very enemy is able to "see" the player and is shooting/hitting/killing them. Now, while some games have designed this into the gameplay (trying to find an enemy that is sniping you/etc.), others achieve it thru the "realism" of the graphics (which was NOT an intent of the gameplay design). Unfortunately, in the later case, the game player can often be more frustrated than entertained by the challenge.
Another thing that popped into my head is looking back at the PC gaming market. While it did lose out to the console market (one reason being consoles started achieving near PC quality graphics at a fraction of the cost and frustration of dealing with drivers/hardware conflicts/etc.), there are some similarities. The PC gaming market started to reach a point where the emphasis for many was on having the BEST high end graphics/etc. hardware in their machine to see a game as PRETTY as it could be. However, in doing so, those people were basically forced into a constant upgrade cycle. That was fine for the hardcore that could afford it. But, for the majority of people out there, that was not an option (nor a desire either). Sure, they wanted better graphics too. But, if they couldn't afford the higher end tech, they would make due with what they could afford. This spilled over into what games they would play on their PCs as well. If their machine couldn't support (or play at a decent enough framerate) the higher end games, they stuck with the lower end ones that had GAMEPLAY they enjoyed. Just look at the success of the original Counter Strike. Not the prettiest game in the world, but it will run on a machine that is considered ancient by many today. In a similar way, the next gen consoles seem very focused on graphics. Sometimes they (console makers and game developers) are missing out on the fact that the GAMEPLAY will not only help the sales of their games, but sustain sales over the long term by attracting people that are not as impressed by graphics and just want fun gameplay (at a cheaper price).
These are just some of the reasons why I think people are starting to take a look more into HOW a game plays than just how pretty it looks. Then again, one study a few years back said that 65% of people made their game purchase decisions based on the screenshots of the game on the back of the box (shudder, lol). So, who knows?