My post on this subject at the Snowblind Studios forum :
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The problem with storytelling is in games, it's basically a discrete mix of movie bits interspersed among the game playing. It works just as a way of stringing together different environments and characters. CON without the story would feel very weird as you move from woods to deserts to hell-land, yet at the same time the story is irrelevant and you can skip it without losing anything. Whether Orcs are attacking, an evil god is opening a portal, or the munchkins have turned bad, doesn't interest me and the players I know.
This gen we're seeing some more story-strong games. There's Heavenly Sword which is very strong on story, and Uncharted: Drakes Fortune. Both are introducing proper acting to the movie-clips (realtime or video) that make the characters more engaging. But they're still creating a chequerboard of gameplay - cutscene - gameplay - cutscene - gameplay - cutscene.
The best story games out there were the old adventure games, which were all about story, basically providing a sort of interactive book, rather than a player-controlled movie. Action games just don't lend themselves to deep story, as you have to interrupt the emotion of the story with the emotion of gameplay. Imagine if reading a book, you have to stop every 15 minutes to play a puzzle game, with moments of frustration as you tackle the challenges. If you interrupt the flow, you lose the impact and the whole point of the story. Could you get the same emotional impact from a film if you watched it in 5 minute lots separated by 10 minute violin lessons?
IMO if the story is going to be presented in conventional form, it's not important what it does. It exists only to move along the gameplay to the next variation of graphics. I'm playing Guild Wars Nightfall at the moment without any interest in the story, and certainly no emotional involvement. The story just exists to move me from one campaign area to another, where I hope to find new skills to vary the gameplay.
I *do* think that perhaps, using some very smart technology and/or design, the story could be embedded in the game though. You'd need to set up a character that people empathise with and a strong enough hook that from the early moments of the game, the player is playing to see what happens next. And it has to be real too. It's ridiculous when the story says 'Quick, we have to get to Windale before the Orcs attack!' and the player's response is 'okay, but I'm just going to spend 3 hours wandering the wood in the hopes of racking up kills, gaining XP, and looking for treasure. The Orcs won't attack until I cross a checkpoint'. The story is always ignored in the game mechanics. The Witchwake (not sure about the name) mods for NWN managed to get around this and for me were extremely engaging. The start, not knowing who you are, and the difference in gameplay so that you can make real life-like choices (avoiding the monsters) without penalty, made it engrossing to play for the story. I didn't make silly gameplay choices - 'I'll fight everything even when this character wouldn't in a proper story' instead of 'I'm too weak to challenge these monsters so I'll sneak around'. ICO was also excellent, providing a couple of characters in a situation that was extremely enchanting. The developers created a bond with the girl that had a human touch (holding the right button down to hold hands was subtle yet excellent, as you needed a physical action to engage with the girl that paralleled actually holding hands) so she seemed like a person rather than a gameplay device. I played the game to try and get them to escape, to fulfil the story, rather than because the gameplay was so engaging. The gameplay itself was pretty primitive and undemanding, and on its own wouldn't have captivated.
I think the new consoles abilities to render emotionally engaging characters would prove very effective in creating empathetic characters making it easier to catch the player's emotional attentions, but without gameplay to match, the illusion will be shattered by nonsensical actions and events and the player will quickly drop back into the normal world.