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As video games develop more and more over the years, companies have been making them more and more realistic-looking. I can guess this is related to expectations, but am I the only one who doesn't care about graphics? We could be using the same processing power to store worlds that have as much exploration potential as the Earth itself if we weren't afraid to save on processing power by going back to 8-bit.
You wouldn't be wrong about games peaking in the PS2 years, in fact the PS3 specifically made itself backward compatible with the PS1 and not the PS2 because it would've given the PS2 an unwanted W in how utterly overshadowing it was.
PS3 had backwards compatibility with PS2 for the first couple of hardware revisions, it was removed later.
The move to "HD" when the PS3/360 were dominant was the death knell of hundreds of mid-sized studios, and gaming never really recovered from it.