Actually graphical detail and its effect on playability is still a major development issue, even for single player games. For example I know you’ve noticed that in Skyrim armor is only four parts, where in the past it was five or more. This begs the question; why? Well according to an interview it was necessary to get the level of graphical detail and number of displayed characters they wanted in the game.
It isn’t just an issue of texture quality and mesh complexity; it is also an issue of how many objects you’re displaying, and if your armor set is several parts (like in GW2 where armor has seven displayed parts) you take a performance hit. This is especially true of multiplayer games. For example if you have ten GW2 characters on screen the game is actually rendering seventy armor objects, plus weapons, plus custom faces, plus the environment, etcetera.
This can really add up and all but destroy your attempts at optimization, so for an MMO you need to accept a few necessities. Typically this means a more stylized art style or several cut corners in terms of graphical detail such as armor sets being comprised of fewer parts, fewer cosmetic options for characters (SWTOR), or even absurdly large weapons and armor (WoW) because the game doesn’t have to render things obscured by those comically over-sized shoulder pads.
You're raising a few interesting points and I could agree with a lot of it. Of course sacrificing graphics for performance related solutions is part of every game we've come to enjoy - obviously for MMOs there's also the concept of "the more people can play it, the more potential buyers we've got".
HOWEVER and that's a big however, mind the caps, when you deliver a MMO in the year 2011 that is completely sub-par of anything else there currently is in terms of graphics and it STILL runs like the entire engine is powered by 2 hamsters in their wheels - you're definitely doing something wrong (SWTOR).
For all I care, they could create something atmospherically and graphically stimulating with an option to strip the game down to its bare necessities whenever you've got grand scale battles or anything of the sort. Hell, if I wouldn't see ANY armor on my opponents in WvW as it currently is in Guild Wars 2 - but instead see their MODELS as a stick-figure representation of their usual look, it'd still beat the crap out of not seeing them at all