Well, i terms of the OP, I would think that the obvious answer would be..well, a balance of the two. As was seen with the recent release of God of War II, people are willing to overlook graphical problems (or in the case of GoW II, being on an older machine) if the gameplay is exciting enough, or if the art style is compelling.
See also: KOTOR I and II, Morrowind, Counter Strike (which is still played to this day), World of Warcraft (who's art design and gameplay make up for any graphical deficiencies)
On the other hand, if looking at the game is like punching yourself in the codpiece, it won't matter how well it plays. That being said, gameplay typically trumps graphics, because it's a lot easier for broken controls to cripple a game than for a lack of bump-mapping.
On the topic of photo-realism, an interesting thing to keep in mind is the idea of the
Uncanny Valley. Basically, up to a point, people will respond very positively to something looking more human, until a certain point, where it will swiftly turn to revulsion. Originally this was applied to robotics, but it can be just as easily applied to computer generated images. For instance, I don't know if anybody else watched the
demo trailer for the game Heavy Rain that was shown at last year's E3, but it was a good example, in that it looked amazing, but the character's lips were kind of unsettling.
I have no doubt that eventually photorealism will become the norm. I mean I remember being amazed at how awesome Street Fighter looked on my friend Jesse's Super Nintendo back in the day...and now we have games like
Crysis, Alan Wake, Mass Effect, Gears of War, and BioShock coming down the pipe. Even look at the difference between the first Halo and Halo 3. I have a feeling that our kids will be playing games that will make the best we have right now look like poo.
