I find it far more plausible that AI-assisted game dev will help indies catch up in scale to 10 year old AAA than the modern AAA studios deciding to throw in the towel on the graphics arms race.
At Xbox Showcase, many of the popular beats were bringing back elements from Halo or Gears of War that fans missed.
The formula for making hits seems to be pretty clear, but the studios are bucking it.
indie games community has joined the chat
I mean publishing titles with the polish & breadth of content of Arkham City , 2013 Tomb Raider , Titanfall 2 etc.
Luckily the market did find a sort of stable target to aim for with the Steam Deck; many modern titles do aim to work well with those modest specs, such as Cyberpunk 2077, Baldur's Gate 3 etc. And when Blizzard launched Diablo IV on Steam, they explicitly announced that they had partnered with Valve to ensure the game was heavily optimised for the Deck and very playable on Day 1 (and it was indeed, from my experience).
Hopefully we see more such examples with the Steam Machine. And I do agree with you that they could've gone with specs worth $250, but sadly with the current pricing crisis, $250 won't get much and I bet many people would've laughed at the specs. Even the Switch 2 now costs $500. :(
The capitalism part actually made sense until it didn't