But I also think that a lot has changed in the five years since I posted this originally: Today we have much more of a consensus that diminishing returns is a real issue.

I think it all depends what you are trying to achieve – the vast majority of games played have unrealistic animations and so on, but often stylized in a particular way that people seem to enjoy.

Also, I do think that games and other art forms are also attractive because they are in many ways unrealistic and artificial.

I am not saying that you shouldn’t invest in improved gfx tech, just that it doesn’t seem to be paying off as much as it used to.

Now good animation requires authoring.. And why do you suffer with bad animation and try to make a distinction between animation and other graphics related topics ? Why don’t you agree that cartoony and unrealistic animation is good enough ? (rhetorical question) Well simply because it doesn’t help you relate. You know it doesn’t behave like that in the real physical world.

See : even movies highly stylized like Pixar movies are spending millions in research to improve rendering quality, light interaction, materials, and yes animation. Why do they do that ? Because it helps you relate better to what’s on the screen. You don’t think “oh that’s a horrible rendering” but instead of maybe they have some ground in reality.
Have you seen Little Big Planet. Big cartoony game but with realistic cues that make you think, maybe those characters are really done out of fabric and so on.

Ambient occlusion (and more generally realistic shadows and light interaction) participates to this. If well done, it helps see depth and how objects are related to each other (is that box hovering or sitting on that desk ?). Also if your art is not contrasted, it makes it pop up more.

Game graphics aren’t anywhere near “good enough”. It’s still amazing to see what can be pushed out of hardware in titles like Gran Turismo 5, Metal Gear Solid 4, Crysis and the like. The poly counts are getting crazy high but lighting and shading seems to be the most important area now, to achieving realism. There’s physics too but that’s another story… ;)

Realism isn’t necessary to sell a game. Smash Bros. is approaching, or has passed, 2 million copies sold in North America and it’s not made with cutting edge technology. Its merits are mostly in its brilliant design.

What’s important is that if a game is pushing to be the most realistic, its design has to benefit from it. If you’re trying to make “The ultimate driving simulator”, you’re going to want to aim for as much realism you can cram into it. You wouldn’t necessarily want to push the graphical limits of technology to make something like Katamari Damacy, where the lack of realism adds to the fun of the game.

Have we reached a point of diminishing returns? These beautiful blockbuster games keep coming out so I suppose we haven’t reached that point yet. When all these companies start going out of business that’ll be the sign to slow down, if most companies haven’t figured it out by now.

As Dominic mentioned, one of the biggest problems with realism in games is animation! Games look great but their cinematics and gameplay have terrible “game animation”. That almost always kills things for me. I haven’t seen much of GTA4 but I hope they went all out on the game animation.

Mouse over the images to see the scene with and without ambient occlusion. To be fair, it is still rather subtle.

I would also disagree that increased polygon counts necessitate a trip to the uncanny valley, as you hint. It’s all about technique in art, after all. More pixels in digital photography show more flaws and more ‘reality’, for instance. I would also direct you to the in-game work of Takayoshi Sato: http://satoworks.com/

His stuff generally has a lot of emotional power and imperfection in its polys. I think people generally just don’t take the time to make that happen.