There's actually a good comparison here with what happened to arcades in the 90s.
By the 6th gen/PS2 era, consoles provided the same graphics as their arcade counterparts and it wasn't long before arcades became a dying breed. Prior to this, arcades were hangouts for a significant number of the core gaming demographic. Not just a place to play video games, but also a place to socialize and compete with other gamers sharing the same interests, namely video games.
The primary place to play games was now at the home, taking gaming into a private community activity rather than one in which you would literally be playing random strangers in a public place. Taking competitive games into a global network space means that once again, you can meet and play with random strangers, only in the comfort of your own living room and on a global level rather than city/local community level.
About the only negative I personally find with the continual move towards an all online video game industry, is that more resources are directed towards the real moneymaking element (in terms of repeat customers base) of a game (online multiplayer) with the obligatory single player campaign often being shortened accordingly as it's not very realistic (there are finite resources in game development as well as a finite number of hours that can be spent developing a game) to expect every game to have full online competitive support in addition to a 20 hour + single player campaign.
These days, the SP is often little more than a practice/tutorial run in preparation for the online game.
On the other hand, online play has helped certain genres, in particular the FPS, become more competitive as well as less restrictive. While it's still quaint to have 4 player split screen games, no one in their right mind would take that over have four separate full sized separate screens instead.
As far as the whole local gaming community element goes, there's nothing stopping people from still hosting the equivalent of LAN console parties, even if they're playing through XBL or PSN rather than an actual closed local area network. It's just not convenient and for the most part, unnecessary for a bunch of people to tote their consoles and a computer screen to a friend's house every time they want to play a game of CoD or whatever.
