IMHO, a key innovation that still needs to occur is a shift away from flunky and unintuitive hand-held controllers to a more natural and vibrant method of input. I really liked the scene in the movie Her, for example, where the protagonist is playing a video game and uses hand gestures to control his avatar, all without a physical controller. Wii and Kinect were the first few steps in this direction - I'm not sure what the next steps are.
I think voice input and NLP is an incredibly fruitful space to explore - imagine what video games would be like if you could actually talk to the characters, instead of merely punching and shooting them.