You only need to watch the credits for a recent AAA game to see that it simply can't be like books or music. There are just too many people involved, like in movie making.
The amount of people in game production is orders of magnitude more than the people involved in producing books at big publishing houses or records at big labels. So no, there's no way niche titles can have AAA production values.
But there's enough technology, know-how and talent around so that niche games can be made using technology from some years back. They can be quite pleasing graphically without being AAA.
So there are two options: make niche games with older technology, or make AAA blockbuster titles with the latest technology. Maybe there aren't more niche games with good production values, although using outdated technology, because they are usually targeted for PCs, and lots of people fear the piracy problem. But it's possible once digital distribution becomes more common.
I don't see a problem, really. I can still enjoy some good AAA games among the newest ones, and I can play indie games when I want something different. The industry must evolve, as any other, sometimes in good ways, sometimes in bad ways. I think the nostalgia factor is strong too, just ask older people if they don't think old movies were better, or older anything were better than what's made today. We're just becoming nostalgic earlier.
