Right now the graphics for the PS3 and Xbox 360 are almost identical to real life, and in a few years time it'll probably look much better. But what's the next console's going to be like? you can't exactly say the graphics will improved substantially because right now in this generation of consoles it's already as good as it's going to get. (obivously can be better but not by a whole lot)
Microsoft and Sony are going to have to introduce some new and improved gismo for the next generation of video games (like Nintendo did with the Wii-mote), because I dought the graphics will be noticely better then this generation.
And you can pretty much do anything with the consoles of today, you can run linux on the PS3 and use it as a PC, or watch movies, listen to music, store pictures, watch tv shows, use the internet, play online gaming, download demos, sleep with it etc etc you get the idea
So what do you guys think they can do? there's really not much except come up with something new and exciting, perhaps virtual reality??? who knows.