I will also actually point out an example I use where better graphics have made games less immersive for me. One of the only real RTS games I've played to any real extent is an old game called Siege. There was no base building, your army is determined from the start of the mission and it's just up to you to manage them. You're either attacking the castle or defending it.
Anyhow, from a screenshot, the units look like they actually inhabit the battlefield, but in action, they are very inanimate, and only have about 16 sprites each - one to face in each direction, and one attacking in each direction. So when you break it down, the "units" are actually more like icons than anything, even though at first glance you can believe that they are existing in the space.
This was, oddly enough, the most immersive RTS game I've really played, and I really believe that it was due in large part to the graphical limitations. Given, another large part of the immersion was that I didn't have to really juggle resources and building, and so I was able to focus entirely on micro-managing my army, but when I played it again recently, I realized a strange feeling that I have never experienced in any RTS after this. Because the graphics were so limited, my mind was filling in the blanks that the computer couldn't fill. And so, when my troops went out to battle and one particular section was defending the main enemy entrance point against several waves, *I started to feel tired for them.* With each fresh new wave of enemies that flooded in immediately after the survivors of the last wave were retreating, I could feel the fatigue of my soldiers as they tried to stand their ground.
Sometimes, they would need to hold their position in time for their reinforcements to arrive, but the game will automatically cause them to retreat to the hospital once they got too weak. With my troops not too far behind, I instructed my army to hold their ground instead, and hold off until the new wave arrived so that they enemy wouldn't leak into the stronghold, and my mind could almost actually hear the commanders yelling and shouting to the troops as they wearily obey.
Next, we'll look at Command and Conquer. I played this a little, before I realized how much I suck at it. But the troops are well animated, and a few sound bytes allow the units to communicate to me that they have received their orders. From a technological standpoint, the game is several generations above Siege. But because the graphics were good and the animations made them more lively, the context jumped over to "what you see is what you get." Now, the troops run, duck, fire, and die with some flashy effects, but my mind no longer fills in what I think SHOULD be happening. When they run into a barrage of gunfire, they don't duck for cover, clutch at their wounds and fire in desperation, because the game no longer gives me the option to believe that they do. Their animations don't factor in fatigue, wounding, etc, so they really only have three states: alive, attacking and dead.
They have life bars, but I don't feel the empathy to call them back from battle, and so I leave them to fight until they are fully spent. When I do tell them to move positions to escape enemy fire, I no longer hear commanders shouting to the troop, because they vocally address me with "Affirmative."
So, although not every game can be summed up as analogous to this situation, this is an example that I always think about when somebody brings up the debate of graphics vs gameplay. This doesn't really take particular sides in the debate, but it does illustrate that graphics can be important, if we don't limit the view to "better graphics make better games."