I have never heard that story, I don't think its an example of SquareEnix jumping the shark or anything like that, I think its an example of a fan whose living in the past and probably believes that VII is all that there is to the series.

I don't think Final Fantasy has lost its place at all. X is the second best selling game in the series and like every other title it got fantastic rating from magazines, critics, and t.v shows. The same thing with XII, it is the fourth best selling game in the series, and earn damn near perfect scores in magazines and such, and XI is one of the biggest MMOs in the world, I'm almost willing to say that its second only to WoW. Many of the spin offs and sequals/prequals do very well in terms of sales. I don't see a drop in square's quality or position. In the real world I almost never hear a single negative thing about the FF series, the only time I ever hear anything bad is when I come to forums like these.