The fundamental fact of game development is exactly it, development. Forward thinking game studios find new ways to convey their ideas into new games, IPs and content. Graphics isn't the only feature which should improve across generations, which you totally forget with your silly examples. Anybody who's every seen PC game graphics settings is fully aware of the fact that you can scale graphics pretty well across different power options. The same cannot be said about things like AI, physical properties of engines and system bandwidth. If you scale down, you have to cut corners with your design choices. No games which load instantaneously hence no fast movement of your character or teleportation, much lower FOV, simplier and less scalable LOD. This impacts a lot of games: fast action titles, open world, MP games with huge maps. Same for physics. Why didn't we have any progress (or we've even had regress) in environment destruction in games this gen? Because of slow budget-level CPUs in consoles. The power of the cloud turned out to be very difficult to help with that problem so Microsoft is changing their song into "you don't need this" now and you're singing along.
No, they haven't. They failed with delivering physics improvements through the cloud even though they have the technology to do it. All they can do is tout the old idea of graphics tiers which every PC dev has known for years to be the next big thing.
Sure, then they'll change their song again and tout "the next gen comes now, look at our new Forza/Halo/whatever The Initiative will invent game" and you will spread the gospel.