The storage capacity of the media being used can effect the visuals due to the size of the textures being used. Resolution and compression.
In the interest of keeping a standard game on one piece of media, texture resolutions would be the first thing to take a hit if space on a DVD became a premium. Adding a second disk is not the solution because it adds more cost for the publisher in licensing/production fees, and in some instances, multiple disks simply aren't practical in a non-linear game unless a full install option is mandatory like most current PC games.
The effect becomes more pronounced the higher the display resolution, which is why it doesn't make a significant difference if the native render resolution is the typical 1280x720 that is the current standard. So far. If a developer was inclined to use higher res textures for a PS3 version of a game, it would mean more work, but it would also mean maximizing the platform's inherent attributes to produce the best version possible.
While a soft update can't create more physical memory, it can allow more physical memory to be available to developers for game engines by reducing the overhead of the operating system itself.
Most are aware this is the reason why a game that requires 2 GB minimum of RAM on a PC can still run on console with only 512MB RAM. Over time, those firmware updates can (already have) reduce the amount of physical memory required for the OS, effectively freeing up more RAM to be available for the games themselves.
Not as nearly as beneficial (or easy) as adding a couple RAM modules to a PC, but with consoles, firmware updates can provide limited future scalability in addressing memory constraints.
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