This thread got me thinking strange things, not about ivy from soul calibur but more about why games would or would not contain sex/nudity/any other taboo subject, in light of this im now going to attempt to compile a reasonable list of reasons both for and against these subjects.
Starting off with Legal, in some countries and states viewing for lack of a better word pornographic materiel isnt acceptable untill the age of twenty one, (not the case with my own country i add) since game cencorship generaly tops out at an 18 certificate or mature rating equivilant it could be possible to argue that such things in games could be potentialy illegal to view depending on your region. This does however work in the other way aswell, if the game is rated an 18's/mature product then there is no reason legaly why it couldnt contain taboo subject matter, i say this as i have no working knowledge of cencorship laws and im under the impression that so long as the product is clearly labeled then there shouldnt be an issue.
Moving on to Morals, This is alittle more subjective because everyone see's these things differently to some it's moraly objectional to contain nudity etc, to others its not a problem, so realy this comes down to what the development team has in mind when creating the product. A game like saints row for example, lets your murder people in a large varitiy of ways running them over in cars, shooting them or just beating them to death with a giant wobbly cock so at this point arguing that its immoral to contain nudity is somewhat hypocritical.
Realism, this is probably the easier to defend, because as much as games may try to avoid these subjects they take place daily and realy games offer a great way to teach players about the issues of racial biggotry and so on, But on the flip side, games are made primarily to be entertaining and that becomes a hard pill to swallow if games confronted people with real world problems.
Artistic value, if anyone is serious about advancing the medium then nudity for artistic value is an obvious choice to make, after all painters and sculpters have been doing it for years, films and books also use nudity for artistic reasons, in opposition of this though most games are not made for the artistic value they bring, but for the cathartic ones and trying to argue that nudity is artistic in a game like halo would loose all credibility.
I guess the final reason would be plain and simple Titillation, You can already buy movies that market this, hell my local HMV (a media retailer, films, books, music etc) on the highstreet has a small section dedicated to porn, its not hidden away either its just crammed in next to the world cinema and martial arts sections. So making games for this seems like a logical step forward, im aware that in some countries this is already very prevelant but im just asuming most people reading this post are not from such a country and the idea of a sex game is considerably less common. I can't realy think of a good argument against games made specificaly for this, atleast one that doesnt come down to Legal/Moral objections which i've already covered.
To round it off, please feel free to contribute any information i may be lacking,(especialy concerning legalalities) any other reasons you can think of either for or against 'taboo' subjects in games.
After reading through this to spell check i realise somthing, i've completely missed the actual topic of discussion. If its ruining games, honestly i dont think it is, if you make that claim then you have to stand by it for every other form of media that has used nudity or sex in its history, because games as a medium are no less worthy than poetry, paintings and so forth. To say that nuditiy ruins games is frankly somthing im not prepared todo, i will admit that its not always appropriate and by no means should be in every game rated 18/mature, there is a place for it i think perhaps we've yet to truly find it.
*EDIT*
Technicle reasons, the effect it would have on gameplay i can't believe i forgot this, to use some examples in a game like skyrim where your characters armor has both postive and negative values, (high armor count, slower movment speed etc) removing that armor puts the player at a disadvantage and because of that you can expect the players to remain clothed ninety percent of the time. As another example in saints row you can customise your clothes but what your wearing has no effect on gameplay, so taking that into account why would dev's spend time on creating hundreds of different clothes if most of the players would run around naked with no penalties. I dont think there are any technicle reasons you could use to argue for nudity in a game, it certainly wouldnt add anything to gameplay unless the game was designed with perverts in mind.