What are you talking about? I say it is possible although I do not believe that they'll do it. Every year has major titles. There will be major titles next year, too. Great games released for PS2 after PS3 launch, you can see it in the wikipedia-list. Nobody expects that MS would let the 360 down after announcing a successor.
And where did I say that MS would compete with those titles? They won't do it, they would want the Publishers to make nextbox-ports.

We have "at the moment" but we also have:

"What we have seen with the Xbox 360 is that the Kinect has extended the life of the console,"

"Historically in the 6th or 7th year console sales start flattening or going down because it’s kind of the end of life,” Pinero explained. “With us launching Kinect a little bit over a year ago, what we saw was a resurgence with Xbox 360. It makes 360 a brand new console if you think about Kinect and you think about the new dashboard and the new UI that we launched this past November. It’s like having a brand new console"

"We want that box to be the ultimate entertainment device in your house, giving you games, movies, tv shows, music, sports, and all kinds of entertainment. So I think there’s a lot more that we’ll see on Xbox 360".

I dont think its the right moment for multiple reasons for both Sony and Microsoft to release a new console. Its not only about the current success of their console, its also about the current ecomic, the lack of profit from current gen system as well as already high development cost for developers and the extremely low demand for better graphic.

The next gen systems may be less about increasing development costs, and more about reducing hardware constraints for developers.

It's universally agreed upon that the key constraint of current consoles is in the limited RAM/VRAM.

Updated CPUs and GPUs are simply a given in keeping with current processor technology. I'd be surprised if SCE continued marketing its latest console through its "magical" generations ahead CPU (Emotion Engine, Cell Broadband Engine) developed from the ground up. It seems more likely that if they don't use an updated version of the existing CBE with additional SPUs or cores, or both, it will probably end up using a PPC CPU that has more in common with the one in the next Xbox than not.

If anything, advancements in these areas (as well as current unprecedented low prices on RAM) should all lead to hardware that is simultaneously cheaper to produce while being multiple degrees more capable. That means fewer constraints for programmers, more efficient allocation of programmer hours (assuming the SDKs/library/hardware are developer friendly) and cheaper development. If more man hours are diverted into art resources (higher res textures, additional texture maps, higher poly count models) it would hardly balloon development costs the way some assume it would.

As for the expectation that games would automatically become even larger, I'm not even sure where this assumption comes from. That was something more tied to the media on which a game was published rather than the hardware/memory capacity. As it turns out, BD format games simply gave developers more space on which to publish their software (fewer constraints, no multiple discs).

It's well known that game development on both SCE and MS next gen platforms is already in progress so it's more a matter of when those next gen titles will be ready than anything else.