Agree better performing games would have made SL more interesting. But I doubt it would have turned it into a big success. Why go to a place to play games when I can just play the games directly.

Personally I think that the "separate games with common avatar and spanning community" is a better way to go.

Side note - A couple other players also tried that:

Blue Mars had better technology and 3d graphics, and ability to make some pretty impressive games, but it never really caught on, mostly because the virtual world itself never took off and retained the players.

Raph Koster's Metaplace tried that approach on the web, building games into an avatar community, and players also didn't really warm to it.