So the really big leap in graphics quality came with the introduction of the dedicated GPU, and a programmable pixel pipeline.  Performing common graphics tasks in hardware rather than software sped things up dramatically, as you would expect.

Graphics are quickly approaching photorealism (probably another decade before they are common place.)

We are also seeing Physic Processing Units emerging, though they aren’t as widely adopted as GPUs.

So what’s next?

I personally would like to see a dedicated AI processing unit.  To me, AI is now the barrier between what we have and true realism. Though some software based AI algorithms are fairly impressive, the speed at which AI could be done in hardware could provide some truly amazing results.

As long as it stays within reasonable price, I'm down.

I'm quite happy with what we have and would also go with AI then. Although I wouldn't like adopting enemies and stuff like that. I like smaller games that are hard as hell until you perfectly play what's always the same (e.g. shmups).

Before they go crazy with new processors they should make the dashboard/home menu thing work well. It doesn't need a processor of course, just better core work. In my opinion it sucks on each console that has it. The loading is really depressing because it's supposed to pop up and not interrupt gaming like that. Xbox Dashboard laggs a lot, 3DS loads for too long and can't handle actions in the menu while a game is running, PS3 isn't great either (though I haven't used it really actually).

Today's AI in games sucks because it's difficult to program good AI. Stronger hardware or a dedicated CPU wouldn't help at all.

It will take a long time before we get good AI because the awareness and demand from gamers and reviewers isn't there yet.

Yep, this. 

Well, there ARE good AI algorithms out there for a huge range of tasks.  It is an area of dedicated research amongst some computer scientists.  They usually are only capable of running on extrememly powerful machines, or just dedicated tech demo type applications.  These type of algorithms are unlikely to be able to be implemented on game consoles as they are.

I do agree that it will be some time off though, and think your point about awareness being spot on.  I think gamers only notice it when it is particularly horrible (eg, why does that guy keep running into the wall instead of walking around it)

Yeah, exactly and that's what is so sad.

Much like they're currently doing with physics, developers need to teach gamers and make them aware of good AI. I wish that would happen with AI but I believe next gen will be more about physics and not much about AI. AI is so important and could improve gameplay so much, but we (the gamers) just don't know it yet.