I think we still see innovation in games, but what's happened is there are also more clones. So every year we get a bunch of first person shooters, that are more or less the same type of game but with different storylines, graphics, and environments. So this drowning by copycat games makes it seem as if innovative new games are not being produced as much anymore.
It has always been this way (at least as far as I can remember, I've had a PC since '86), you just don't remember the 1,000,000th space invader/pacman/tetris clone.
Sometimes clones work. I really enjoy some Super Mario World romhacks, for example, because they took a winning formula and did it well. Here's my favorite one:
