Diminishing Returns? For the most part Nintendo completely understands sequels and diminishing return.
Characters don't have diminishing return by the way. A good character will always be funny as long as you do something new with it. The same is true with games. If the IP or franchise introduces new and/or compelling game play then there will be no diminishing return for each franchise.
Using Nintendo's franchises for example:
Super Mario Bros, Super Mario 2, Super Mario 3, World, Yoshi's Island, Mario 64, Sunshine, and Galaxy
None of these games safely take the route of repeating game play without adding anything new. No, each adds unique elements to the Mario game play and refines it and perfects it.
Legend of Zelda, Zelda 2, Link to the Past, Ocarina of Time, Majora's Mask, Twillight Princess, Four Swords, Phantom Hourglass
All of these games offer unique play experiences, and adds to the formula, or perfects controls, or whatnot. Zelda may not be as radical as Mario's evolutions but it is still there.
Now, lets look at a Nintendo franchise that fails to do that:
Mario Party 1-8
Although these games are all fun, and introduce new elements they just aren't compelling...and it isn't because Mario is hurting the series...it is because there have been 8 games with little change.
If you look at MOST of Nintendo's franchise sequels you will see little diminishing return because Nintendo does sequels right, and focuses on compelling game play and then allows the gamers to enjoy the characters they already love.
Star Fox, Wario Ware Series, Mario Kart, F-Zero, Smash Brothers, The Mario RPGS.