In Damion Schubert's AGC presentation "Men in Tights", he proposed several possible reasons why MMORPGs continue to favor fantasy settings. Though I agreed with each of his points, there seemed to be something underlying it all that got overlooked. The fantasy setting is particularly conducive to mythos (the revealing of truth through metaphor and story).
This industry is always citing escapism as a common player interest, but a common interest that passes under the radar is truth.
Look at this list of the top-grossing films in the U.S. of all time: http://www.imdb.com/boxoffice/alltimegross Do you notice anything? How many of the top 25, or even the top 50, are didactic? How many are ultimately about moral themes (relationships)?
People can appreciate truth in games as much as in any other form of entertainment.
LOTR is an allegory through which Tolkien confronted real issues and real depths of human relationships (read the Tolkien biography by Joseph Pearce for Tolkien's understanding of mythologies, and Tolkien's labeling of LOTR as "a Catholic myth"). Popular stories like this don't present problems and leave them entirely unresolved or without comment. These stories, the most successful works of their craft, are didactic. They propose answers to the moral questions they raise.
Escapism doesn't show up only in entertainment. Just as people sometimes want to hide from the real world through escapist entertainment, they also sometimes want to confront reality through entertainment; to punch through the illusions of a world gone mad. Mythologies like LOTR allow both simultaneously. They allow us to confront truth and to validate our lives without having to look the world directly in the eye, like we are practicing for the real battles. So barren, by comparison, the mythologies of most video games seem to be.
How might this be applied to an interactive medium like video games? How can the player be given meaningful influence over such a story? Let me give you an example of how mythos may be applied to an RPG.
One thing MMORPG players have been complaining about for years is the abundance of "manimals". Dog-people, cat-people, cow-people...there are so many humanoids in these games that players see it as a lack of developer creativity. But manimals are a perfect opportunity for mythos.
In the real world, scientists are slowly but surely progressing towards laboratory production of chimeras (animal combinations; the synthesis of species...beyond mere cross-breeding). For years, biologists have been making rats which grow human ears on their backs. The scientists then cut off the ear and apply it surgically to a human in need. Now, scientists have created rodents with 1% of their brain cells being human. Some have stated explicitly that they are aiming to create rats with 100% human brain cells. Needless to say, this has raised a serious ethical debate (one which will slowly make its way into mainstream news).
In response, an RPG developer could create a sizable series of characters, stories and quests involving a scenario in which magicians/scientists are creating chimeras (manimals). Not only would this explain the abundance of chimeras, but it would also provide players with opportunities to either hinder or promote the production of the creatures. A skilled designer could give players the satisfaction of having an effect on an issue over which they feel powerless in real life. In addition, the players could be presented with real arguments for both sides of the debate in an organic way.
Even young children have a desire to confront real evils. That's how Walt Disney became a household name...the creation of didactic family entertainment.
The game industry could choose to embrace the willful ignorance of Hollywood. Look at those best-selling movies again. If the game industry truly wants to expand its audience into cross-generational entertainment, it must push beyond wild thrills, loud explosions, and gory slaughterfests. Those can all be tons of fun, but there's no reason we can't mix truth and moral enlightenment in there somewhere.