In the comments, someone pointed out that the film industry has been in a similar state for a while now, and they seem to be doing just fine. Same for music and fashion. I don't entirely agree with the idea that film, music, and fashion is completely lacking in innovation, but then, I disagree with the idea that the game industry is lacking innovation too. So I think the point is valid.
Which leads me to wonder: why are people so much more apocryphal about the games industry? Do they know something we don't? Is there something that they, in their lay, outsider positions can see that is too close to us for us to spot?
No, I don't think they do. But position in this is important, because it's your point of view which determines what you see. And what everyone can see is a massive slowdown in innovation in the games industry. I'll agree with that.
However, position is relative, and so is slowdown. Yeah, we're seeing a bit of a slump - after over ten years of more or less unrestricted advances in gaming. After what we've been through - 2D to 3D, multiple generations of dedicated hardware, the increasing connection between western and asian gaming markets - dropping back to a 'normal' pace is going to feel like a full stop to anyone who's being swept along. The earth spins at many thousands of miles per hour; if it suddenly slowed down a couple of hundred we'd all feel it, but it'd still be spinning at many thousands of miles per hour. And that's what we're dealing with here - a growth recession, rather than negative growth.
The really ironic part is that the biggest advances are still to come. Our technology is reaching a point such that it ceases to limit us creatively; now we'll begin pushing forward gameplay. The Nintendo DS comes with a touch screen built in; the Xbox 360 is rumoured to have native support for a webcam, and of course the PS2 has the Eyetoy (and I guess the PS3 will have something similar). The folks at CMU are coming up with some interesting stuff, as well as the pros. The indies aren't falling behind, either. Now's a great time to be pushing new, interesting gameplay ideas... like, say, a game where you have to make noises into your microphone to do things, or a game set in the second person.
Or you can go make another RPG. Whatever.
[Edit: Man, some of that CMU stuff is fun. Go play Tower of Goo, or On A Rainy Day!]