|That's pretty much what the future looks like for consoles, I fear.|
The real weakness in the console market is the dependence on physical distribution of games. This keeps publishers tied to high price points (now $60), and high development budgets (since you have to put $60 or more of entertainment value in each package) and dealing with retail stores and returns and inventory and packaging. When you take all of that away with digital distribution, you are freed from the need for high price points. Which means content can be of variable length, and lower development budgets are possible. Alternative business models like free-to-play or ad-supported are viable. A huge range of possibilities opens up... most of which traditional console makers are afraid to use.
Why? Because stepping in that direction means pissing off the retailers, who are still responsible for the majority of their revenue. So they take baby steps, and new game companies without a physical distribution legacy are free to grow into that space. And find ways to undermine console makers, like OnLive or Gaikai or Apple TV or Google TV.
I think the 3DS is a harbinger of what's going to occur for consoles. Nintendo's new box, regardless of hardware specs, will probably be in the $300 or more price range and rely on physical distribution of game discs. Those two factors will mean it will never sell as well as consoles of the past, as new business models with $99 boxes begin to take hold in the family room.
Hardcore gamers are still tied to consoles, but even that will change over time as the new wave of boxes develops even greater power and capabilities. Remember, the smartphone-technology based family room boxes (Google TV and Apple TV, et al.) are based on smartphones that get a significant tech boost every year. Apple's last boost (from the A4 last year to the A5 this year) was about a 9x graphics improvement. How long will it take to catch up and then pass current consoles? Far less than their 7-year cycle.
Sony and Microsoft have some idea of what's happening, and are making some moves to cope. But both of those companies are not used to being nimble, not the way Google and Apple are. At least Sony and Microsoft have a chance at maintaining a reasonable market share... I am very worried about Nintendo. I fear they are heading towards just becoming a software company, like Sega did. Sounds like the big tech improvement for their new console will be controllers with a display screen... which is arguably what smartphones are for the new wave of consoles.
It's a time of great changes... and some will thrive on those changes as others wither. Place your bets now, folks, the game of games continues...