FWIW, I actually don't think this is too far from the truth. For starters, the problem with the improvements being made on the graphics front is that the budget to produce games that maximize the graphics horsepower has ballooned to Hollywood movie-like production levels. GTA IV reportedly cost over $100M to produce, market, and distribute. That's insane, and the economy behind the gaming industry just isn't going to scale when too many of these games start getting into budgets beyond that.
My contention is that the next generation of consoles will certainly see gains in the GPUs, but it will be of a much smaller order of magnitude than it was this gen. The next iteration of consoles will, however, see their normal jump in raw CPU horsepower though, because the next gen consoles will need powerful CPUs that can code/decode multiple MPEG streams simultaneously WHILE you're also playing games.
At least, I'm 99.9% certain MS is going to want to make the next XBox also be a more fully featured media center and PVR. TiVo, Slingbox, Apple TV, etc are all threats to MS's goal of controlling the living room.
