Depending on how long this generation lasts, I would assume that the next generation will have nicer graphics, though I think the days of exponential graphics increases are done.
In the future, advances in physics and AI will most likely be more predominant. Doesn't matter if you have a photorealistic scene if the physics don't make it believable.
I hope that the next generation will focus more on gameplay and interaction, rather than graphics, and I think that it's a likely outcome based on how the Wii is selling compared to its two graphically superior counterparts.
Having said that, PC's are already more graphically impressive than both the 360 and PS3...so there's no doubt in my mind that someone will build a console with better graphics than this generation. The components used for the PS3 are liable to be dirt cheap in 5-10 years (whenever the next generation starts), meaning you could get at least comparable graphics without breaking the bank like Sony has been doing.
While it might sound strange now, its possible future consoles will all use Cell processors (or its successor) if it becomes a mass market item.
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