Your friend is correct. Old games have 320x240 resolution... which is only HALF the maximum NTSC or PAL tvs can support. Even newer games on the PS1 or N64 suffer from "blockiness" due to a lack of polygons.
But that's not why we play games, is it?
We play games *despite their ugliness* because they are hella fun! (To borrow a phrase from Cartman.) You don't need a bazillion colors and 10 million pixels to enjoy a game like Ms. Pac-Man or Super Mario Bros.
Tell them that.
BTW the same applies to old movies. Charlie Chaplin's movies may look "blurry" and "choppy" from inadequate framerate, but he's still darn funny! Just because a classic movie like Casablanca is in black-n-white is not going to stop me from watching it.
Only a fool would refuse to watch Casablanca or play Super Mario Bros.
[edit] [I'm going back to college in 2008 (or 9). It will be most-amusing watching the reactions of 18-22-yr-old college kids as I sit down & play my 8-bit Atari or 16-bit Super Nintendo. I can already predict it: "What are you playing that pixelated crap for?" haha.]