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There are a few things consoles can upgrade:

-Almost all games so far are not 1080p and sometimes not even 720p and are merely upconverted from lower resolutions.
-More/faster storage (such as SSD)
-New interface (no longer use a controller at all?)

I really think that as a whole consoles will eventually begin to be built into TV's and other electronics. The good thing about PC gaming is the games are always coming out with more demanding tasks and so you are forced to upgrade. Not to mention PC games support much higher resolutions than HDTV's at 1080p.

The way I see it, next generation will be dominated by motion controls (of any and all kinds), all full 1080p games, and more features built in to make them "media centers". After that, there may not be any more generations as TV's may finally be using resolutions higher than 1080p and the console functionality will be either built in or perhaps cloud gaming will have taken off by then. Who knows.