Graphics Do matter. It's as simple as that. However, what is bothersome is that graphics are being focused on in the wrong order for most games now coming out. Here's the breakdown as I see it and as Gothmogll kindly pointed out:
Technical- These are your polygon counts, your visual effects, your bloom and brown/grey filters, etc etc. These are nice and don't need to be turned up to maximum (in fact, you'll probably end up losing sales because nobody will be able to run the darn thing/too many loadtimes) but there's a really funny argument in here as well. So most people at this stage go: "Well what about Minecraft/FFVI/ChronoTrigger/insert other awesomely amazing 16-bit graphic game, they aren't shit and look great!" Well, you'd be correct, because they're from a different era where different techniques are used. They're stylized (and I'll talk about that below). Funny enough, you don't see these people defending games like Call of Duty, Perfect Dark or Dark Forces II for their mind-blowingly awesomeness in their graphics department. Polygons are what changed our perception of gaming and most games that you look back on that had eye-popping graphics back in the day look like utter crap now. They sold on graphics then but now they rely on other means to be classics. Heck, I popped in my Orange Box a few weeks ago and thought the graphics for HL:2 were absolute shit and jarring when compared to what I'm used to seeing churrned out. Technically, there is a point where your game just sucks because it has bad graphics in this polygon world, but that doesn't mean you need to make the thing a friggin beast that no one can play.
Visual- This is probably what's most important. If Technical is the shine, this is the surface. This is what will make or break a game in terms of graphics. If the game has no style, it's just another brown/grey shooter, so to speak. Games like Borderlands, The Darkness and the Tales serise have all used cell-shading as a particular style. Another fine example is BioShock in that it isn't the best at graphics (though it's still a high quality) it does put that extra attention of the things that need to look extra nice. In BioShock specifically, that would be the water. It's absolutely stunning what they did with the water effects and it certainly reminds you that you're in a god damn ocean every five minutes when you see waterfalls of it arcing from busted pipes and windows. Even the 8-bit stylings of MegaMan 9/10 give that retro popularity that so many people just love to see. All in all, the style is what will make your graphics great, but you need to back it up with technical prowess as well to make it even better.
Communicative- These are the graphical cues that you get that are specifically to do with how everything in the game works. It's how that button for a quick-time event appears. It's your HUD in a shooter. It's the pathing lines that units have in RTS games. Simply put: these graphics directly have to do with communicating how the game engine will perform because of commands you put in/what will happen if you put in those commands. This can be really important too and add to the style of a game, so I'd probably chalk this up to second most important. Games like Dead Space heighten the tension by moving your classic HUD and give audio and visual clues to compensate. Flashing bosses mean they're low on health/close to defeat. Frame 34 of Ryu's Shoryuken is when it's most vulerable and needs to be countered into a Super Combo for the most effetcive damage. If you can't communicate what your game is about through graphical clues, most gamers will never bother trying to pick it up and play these days. This stuff is important.
There you go, my opinion on graphics. Take it for what you think it's worth.
As a side complaint, I'd like to know why graphics are being taken in the direction they're going. Doesn't everything already bloom enough/have enough grit/shine enough in the sunlight? You know what I'd like to see, Peter? Why don't you take a few of these graphic geniouses and come up with some sort of engine that renders hair properly! You want me immersed? Why don't you make my character look like he's not wearing a toupee 24/7 that's super-glued on. When a giant dragon starts circling around me, I should be seeing crap blow every which way, including the God damn hair on top of my character's head! Seriously, REALLY minor detail that would boost immersion through the roof.