Wait, since when was the video game market courting kids?
According to Wikipedia, of the top-10 selling games for the Playstation 3, five of them are rated M for Mature: GTA IV, MGS4, Heavenly Sword, Resistance: Fall of Man, and Killzone 2. The other five are all rated T for Teen -- there's not a single E title in the bunch.
On the Xbox 360 front, we have eight M's: Halo, Gears of War, Gears of War 2, GTA IV, Call of Duty (Both Modern Warfare & World at War), Fable II, and Assassin's Creed. They actually have one E title -- Forza 2, a racing game. The other one, Guitar Hero 2, is rated T. (Apparently pattern-matching is too intense for the 12 and under set?)
(Of course, the big standout is the Wii, with none of its top 10 titles above a T rating. But then again, "casual gaming is killing the market" is a common mantra these days.)
Now, as for his other thesis statement -- that game constantly ramp up the difficulty until people stop playing them -- there's actually been a lot of complaining about games NOT doing that, these days. Metal Gear Solid IV has been criticized for its ridiculous amount of cut-scene footage -- you know, time spent watching instead of playing. The recent Alone in the Dark advertised the ability to skip levels that were too hard to play as a "feature."
Weakness to push boundaries? The much ballyhooed Mass Effect had a sex scene in it. Fable I and Fable II constantly extol the virtues of "moral choices affecting your character." Bioshock gives your character material rewards for molesting under-age girls. World of Warcraft recently introduced a plague as a plot device ... and the CDC took notice of how real-world scenarios played out in the virtual world. No, boundaries are being pushed in both the indie corners and with the big players.
As for being "light years away" from powerful story-telling ... well, Mr. Cage is simply mistaken. Myst and its sequels have often been praised for their involving world design and for their compelling back story -- and those games are non-violent, non-sexy, non-mature-rated. And there are many more gamers who cried when Aeris died ... than who ever cared to see a Final Fantasy movie in theaters.
Mr. Cage is making a fallacious statement by saying that a story's not "real" if the game it's in is for "kids". As Pankyman just said, would EarthBound, Final Fantasy VI, Chrono Trigger, and Mother 3 not have "real" stories? What about The Gregory Horror Show? Or Myst? Or Harry Potter, for that matter?
If there's a revolution to be made in gaming, it should be in developing a player-controlled immersion, not just cheap gimmicks as AO-rated cut scenes where we sit and watch like it's a DVD porno, or with cinematics of our characters saying and doing things we didn't choose to do, but rather that some developer put in our mouths, while telling us it's "story-telling."