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I would say we are seeing more innovation now than we have in a long time, for several of the reasons I stated, and the most innovative games (Wii Fit, LEGO Indy Jones, GTA IV) are clearly the most popular.
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I think the Lego games and GTA are popular because they are sequels to popular franchises, whereas other innovative games such as We Love Katamari, Okami, Ico, Zack & Wiki etc. etc. didn't do so well.
Unfortunately I think it has a lot to do with the media out there, computer magazines constantly push certain titles such as Metal Gear Solid and Devil May Cry for months and months, generating hype and expectations, other games get good scores but very little column space.