It's fucking up Square because they have no foresight. It's not a question of pushing graphics, heck if there is ONE thing Square keeps doing it's pushing graphics over everything else. Ultimately, getting better experience in AI and physics and procedural animations pays off, because you can then automate processes and deliver new unique experiences that seize large market shares. It will just take a bit of time before the average gamer understands how games will change in the coming years, in general. Right now it's a painful process, but the rewards will be big. Game worlds will be larger because we are now getting the tools to make more content faster, the dynamic content in those worlds (vegetation, AI, weather, etc.) will be more automated, allowing us to flesh out the game worlds further and deepen the gameplay possibilities. For example, let's say you're making a fantasy game, well it will be easier to create all sorts of creatures without making animations for each of them as they will be more AI and physics driven (think Spore, for a simplified idea of how it works).
There are a lot of aspects that have been emerging only recently in game development, we've been tackling some of those issues for less than five years in most cases.
So no, companies like Square should not avoid those challenges because one way or another they'll need to tackle them, and if they don't do it themselves they'll have to buy studios that have, which is costlier than doing it yourself unless you just don't have the resources.
The current generation is really a transition phase on its own.