Consider this: when you are watching a movie on your TV you are seeing a standard resolution image; assuming you are in an NTSC country that would be 640x480i. When you are playing an Xbox/PS2/GameCube game on the same TV you are seeing the exact same resolution.
Which looks better, the movie or the game? The movie of course.
The truth is that, contrary to what Sony and Microsoft would have you believe, resolution is not the most important factor in graphics quality. As anyone who is into first person shooters on the PC will tell you, the effects are much more important.
Whenever a new blockbuster arrives, be it Doom 3 or Far Cry or whatever, they have to make a choice between going for higher detail settings or higher resolutions. What they"ve come to understand is that, if you don"t have enough horsepower to go for both, it"s always preferable to jack up all detail levels to the max, rather than to go for the highest resolution possible.
For games running at 1080p half of that power will always be spent in order to show fine, miniscule details that simply aren"t there, because the remaining power isn"t enough to produce them. Can you imagine the kind of effects, or the number of polygons, developers could utilize if they were allowed to design a PS3 game running at the normal 480i resolution?