I think what makes KZ or motostorm incredible is not only their graphics. As someone pointed out, animation and how objects interact with each other is as important as how things are rendered on screen. The PS3 movies were looking -impossibily- beautiful, because not only the graphics are beautiful, but also they have -almost- excellent animation and natural object interaction.
Take KZ for example. Yes, it has beautiful graphics. But, it has equally well natural motion in almost everything. Every object in the movie moves realistically. When a vehicle is hit with a missle, the way it shatters into pieces and the way each piece falls to ground is exactly what you expect in real life. When the guy on the bridge is hit, instead of falling, his belt is strapped to a piece of metal and he hangs in the air. Again, this is exactly what you expect to happen. These looks really all cool, and makes the scene more real and believable. Unfortunately, these are easy to script as well. But, can they be done in simulation? Even if they can, how feasible it is to define these small details in the scene? Do we have enough ram to store these details (i.e. physically defining the belt of every soldier and every piece of small metals coming from the bridge to simulate a possibility of such interaction)? I am not sure.
I think games will get better and better in each generation. We will see game engines incorporate better lighting techniques. We will see objects in the game rendered with special pixel shaders that simulates the physical charasterictics of the surface and its interaction with the lights. We will see more objects in the scene that interacts with each other. We will see better much AI. With given time, we will see even better graphics than what is shown in these movies. But, I do not think that the amount of interactions in environments will ever be that detailed, at least not in this generation.
