First, talking about 'immersion' the way he does is a mistake. All you get when you talk about immersion like this is people who tell you that you can very well be immersed in a poker game and that fireballs aren't realistic.
That's why I use the term "simulation" as in "simulation of a fantasy". And all games have some form of simulation aspect. It is strong in Call of Duty and Skyrim and weak in Poker. But it's always there (King > Jack).
Second, you have the world-simulation (Skyrim or Fallout) vs. the story-simulation (Call of Duty, Mass Effect) issue. They differ in the degree of freedom the player is allowed. A high degree of freedom leads to players telling their own stories, whereas a low degree of freedom makes a developer-created narrative necessary. Raph Koster means world-simulation when he says immersion. Very good examples for world-simulations are his games Ultima Online and Star Wars Galaxies.
Third, Mr. Koster says
Ok .. I agree. There are successful games with little focus on the simulation aspect. But that's not new. There are also games that have a strong simulation focus and benefit from it. Skyrim is the latest example. The abstract gameplay of Skyrim is pretty boring; and so is the abstract gameplay of Call of Duty! It's the simulation that makes these games great.Immersion is not a core game virtue. It was a style, [..]
At the end of the day, games need to keep the players' minds busy. World-simulation, roleplaying and stories are ways to do this. But so is execution speed (raiding), logical thinking (Chess), hope (slot machines), beauty (Skyrim) or rhythms (pianos, yes, musical instruments are games). In fact, even insults are useful (Portal 2).
It is true that the current focus of the non-facebook/non-smartphone/non-indie industry is the story-simulation. It's true in Call of Duty and Battlefield single-player modes, SW:TOR and the other Bioware RPGs, like Dragon Age or Mass Effect.
But there are also games which put more focus on the abstract gameplay, like modern World of Warcraft, Magic the Gathering, Poker or Chess. And, finally, there are games with a strong world-simulation aspect: early MMOs, also called virtual worlds, and even classic WoW to a degree. The most popular current example is Eve Online.
The currently dominant style in the indie/facebook/smartphone games business can easily be explained with new technologies. These new technologies caused a trend towards short-term distractions instead of epic experiences (which world-simulations necessarily are). But this trend will reverse as the market for games matures. And it will really reverse in 20-40 years when many gamers in (then) developed countries retire. I'll be there.
Edit: Koster wrote a FAQ on the immersion post and I happen to agree almost 100%.