Some thoughts on immersion
In the non-fiction comic book Understanding Comics, Scott McCloud talks about how a simply-drawn cartoon character may actually increase our emotional investment versus a more photorealistic character. The theory goes that an iconic representation is a partially blank slate, and we can more easily project ourselves onto them. Tintin is an example of a comic where you will find panels including both detailed background art, and a much simpler, more cartoony character, thus drawing us into the scene.
By this logic, in third-person gaming a cartoony avatar (say, a World of Warcraft character) may be easier to identify with than an avatar rendered in more detail (such as a Heavy Rain character).
It's an interesting idea. As graphics improve, and both characters and environments become more convincing, the possibilities for immersive experiences are also commonly thought to be greater. But I don't think that tells the whole story when it comes to the role of graphics in immersion.
Gaming includes scope for many different kinds of immersion, and a range of ways to define the term. I do think immersion is thrown about a lot as a concept, and is often poorly defined. See the following article for a more scientific look at defining immersion: Jennett et al. (2008) Measuring and defining the experience of immersion in games. International Journal of Human-Computer Studies 66: 641-661.
For me personally there has always been at least some personal investment in a game. Even back when I was a kid controlling a couple of pixels on a screen I remember being torn about the experience. Part of me dearly wanted to keep playing; another part was terrified of dying. I understood the "death" of my pixelated spaceship had no real world consequences, but it still affected me enough that I could even be very reluctant to play when given the opportunity. I think I've always found projecting myself into a game space a very natural and unconscious thing to do. That projection is what I call immersion.
A high level of emotional investment and involvement has been described both as a holy grail of game design, and as a cause of hyperreality and problem gaming (see here for a quick example, though it's not an article I agree with).
There is also the potential for raised anxiety, which I have certainly experienced often enough. I find it very interesting that looking for games (and movies, television or other media) with genuine emotional impact means exposing yourself to feelings often considered negative. And yet, it remains entertainment. I actually find this a very positive thing, and think we can learn a lot from experiences in fictional spaces.
Although it took a lot longer than it would normally do, I found it interesting that I became emotionally invested in a protagonist I didn't particularly agree with in The Saboteur.
Avatar: immersion gave us depressed people who pined for Pandora and hated our world.
For me, immersion is being so involved in a game, I don't want to put it down, like a book. I'm currently immersed in Port Royale, but I am not thinking about my player as a trader or a pirate or a freedom fighter. I just want to win and kick some butt.
But overall, like you said, it is entertainment and companies need to be aware that too much of a crossover transcends entertainment into something else.
Ow my brain!
The immersion problem in gaming is also that it's so damn easy to break. Without the interiority of novels or the linearity of film, it's way too easy to simply play in bad faith. And often quite fun. Running around in circles as Alyx stares at you worshipfully. Shooting an NPC in the head everytime they replay their canned dialogue. Etc.
But what really bugs me are the designs for open games which actively reinforce this behaviour. Look at Fallout 1 and 2 versus Fallout 3. For most of F1/2, you have no idea where to go. You're looking for an important Macguffin, but you just wander around asking people - do you have a water chip? No? Sure, I'll rescue your daughter.
For Fallout 3, you never have any uncertainty about where you go next. You're desperate to reunite with your father over to the west; So why on earth will you go down to DC to kill ten molerats.
Final Fantasy games are particularly bad at this.
@Mr Ak I could write several essays on the problems with Final Fantasy games... and, let's face it, I probably will.