I'd give the advantage to the 'middle market' for a number of reasons.
Digital distribution is certainly going to help, however what I see being one of the biggest advantages is that the mega-budget games often are driven by the publisher's perception of market demand to allocate their resources towards shiny graphics and clever engines. The 'middle market' has the potential at least to focus on actual AI or story development, which are more often in my mind the real hallmarks of a great game.
Contrast Dragon Age with Baldur's Gate, for example. I devoted years of my spare time to BG and its sequels, replaying multiple times. Dragon Age I played through once and discarded. The quality of the plot, and the more open nature of the BG world had everything to do with that.
In a similar vein, contrast the AI of Civ V with GCII. No comparison whatsoever. Especially by the end of the cycle, the GCII AIs felt like opponents - not perfect, but the idea that you might be able to 'get in their heads' wasn't laughable. They had motives and judgement and executed accordingly. Civ V feels like playing against a cup of dice.
Another thing favoring better game development by the 'middle market' is that what passes for discount graphics these days are actually quite pleasant. Even minimum computer specs these days are capable of astounding things, and there is lots of precedent for simple (to code) but great-looking graphics. So putting resources into excellent art, story, and AI doesn't necessarily mean looking at a pixellated mush on the screen.