Exactly, but that will backfire too. Video games has always been a market that punishes conservitive design i.e. "more of the same" type of designs.

These systems won their gen by innovation

Atari 2600 - Removable Cartridge Media and Nonintegrated controllers

NES - Reopening a market thought to have been dead by strict games quality contol

SNES - Mode 7 Graphics along with extreme 1st party game quality.

PS1 - First Mainstream Optical System and First 3D games

PS2 - First System with True multimedia function and Backwards Compatiblity

Wii - First Mainstream system to have a motion controlled default controller with a focus on gameplay over graphics.

One solution:
Have 2 drives:
1 SSD drive with enough space to cache one entire disk
->this will go down in cost over the life cycle of the product, and offer blazing fast access times.
1 normal style HDD
-> This is used for what the HDD is currently used for, which the exception of the X360 disc cache

Upon game insertion, it works as it does without install; things are loaded from the disk, and the game starts as they normally do to hide loading times; developer icons, title screens, etc.

The whole time, however, it is also precacheing the disk to the SSD. The disk is optimizeable so that the most needed textures are all near each other on the disk for faster read times (through no need to seek).

In this manner, the cache will fill itself as you are playing it; the first time you play you may have to deal with the loading that we put up with now, but as the disk populates it will get faster and faster.

This is likely where even the 360 is going to get to eventually; it's the next logical step in HDD caching, and since the data has to get loaded anyways to play the game, it takes very little extra work to send it over to the SDD as well (in fact, this could be done in hardware in future generations at very little cost).

Edit: I should be clear; as I said, I expect the 360 to get to this point eventually.  It does not need a separate SSD; I just posit one for performance gains (since if they follow this generation's HW, they will have both a flash drive for the OS and a separate HDD anyways)

Next gen we'll get 512mb of internal storage and a SD card slot and we'll love it. JK, but forget about SSD's, even by the time next-gen lands they'll still be more expensive than HDD's.

I think another advantage of this will not only possibly improve DLC, but mainly with the game files right there on the hard drive, companies will be able to finally install patches to fix bugs, or make updates for console games. I still remember wishing to have this ability when I bought Wayne Gretzky 3D Hockey '98 and that stats programming was all Fd up.

ssd is not the solution for all problems yet. while ssd beats harddisks on seek times, they still lack transferspeeds. the fastest ssd currently can reach max transfer speeds in the area of 100mb/sec for read operations the cheaper ssd drives usually end up at half to 3rd of this. Also flash is still considerably slower at writing than reading often less than 40% write speed.
for hds 100mb/sec for read and write is what a average 7200 rpm disk can easily reach, the top disks for transfer rates like the velociraptor can reach nearly the double values of that.
That also means that current SATAII standard is fast enough for ssds cause it can transfer up 300mb/sec which no disk (harddisk or flash based) has reached yet. and tghe next sata standard which will again double rates is allready finished and might enter the market over the next 2 years i think.

So for now ssd's are excellent for all applications where seek time is most important like most server applications that have to deliver low amounts of data very fast (database, webserver). But for applications where its all about transferrate or write speed standard harddisks are still a lot faster.
In most tests that i have seen about ssd where tehy tested them in pcs on typical games or typical non seerver apps the advanatge of them over standard 7200rpm sata hd drives was minimal or non existant, sometimes the transfer speed even gave the hd drives the upper hand.

also the problem with flash is that while price is slowly coming down there is no real way to accelerate this process, the cost of them is based on the cost of the silicon wafer they are made on, and on their die size. First thing doesn't change much, and the die sizes shrink very slowly (a process shrink usually reduces sizes by 30-50% but happens only every 1.5-2 years).

Flash based media for game distribution is also quite unrealistic for next gen:
Right now you can find the cheapest flash based media at ~2 euro per GB in europe if you are looking at 16gb models which currently have the ebst price per gb ratio (so my guess is that manufactoring cost for this is still more than 1$ per gb). so if you would want to replace a single layer bluray with flash you are taking about at least 25$ production cost per media compared to 1$ or less for the blu ray (depending on production numbers, you have a high initial cost in optical media production but a cheap reproduction cost).
being optimistic for flash it will come down by 60-70% in the next 3-4 years before next gen consoles come out to market, which would still leave a 25gb media at more than 7.5$ and a 25GB media will probably be not big enough for next gen so you might have to double the media saze which doubles the price again.

So its very obvious that for next gen the distribution media will most likely be optical again, the only alternative to it would be a streaming based download distribution (loads about 10-15% of game at start, then you allready can start playing while it keeps downloading in background) but if that works will depend a lot on what the standard isp price models will be in 3-4 years. if a 20-50gb download would still excess your download limits in most contracts this will be no real option.

I’m an elite user, so this won’t apply to me, necessarily, but imho, M$ should offer a rebate for all pro users who purchased before a certain date. Basically…off a $20 rebate if you upgrade to 60GB, and $30-40 if you upgrade to $120GB. That way, you’re basically providing people with an incentive to switch over and use the XBL service more, since they will have more HDD space. I’d like to see a new 300GB HDD to replace the 120GB at the $199 range, since I would snap that up pretty quick!

Actually a Memoright flash drive achieves throughput of 125mb a second average while a 300gb Velociraptor only achieves a 102 mb average dropping to 65mb a second which is the target a developer would have to code for, so by the time the next generation rolls around we will have flash drives in the 2.5inch/1.8inch console range that are between 3-5 times faster than the notebook style HDD's they replace.

Furthermore by the time the next generation rolls around the 32nm process would have become comodity and therefore it would reduce the cost of each GB to 1/4 what it is today at least. So a 10gb size flash drive would cost very little by that time and could be easily integrated into the console.

I am very much for SSD drives for the next generation, but I also think that it will end up being too expensive. And we also have to consider the optical media then.
8x blu-ray drives could be used for the next console generation (or the ones with blu-ray in them at least), which should improve the situation of the blu-ray a bit, making it seem less profitable to use flash discs for games compared to blu-ray.

The two advantages optical media have today (I'm feeling this will still be true at least one more generation) are price and longlivety.

The later being most important right now, HDD's just don't last as long as a DVD or Blu-ray discs. And with proper care (and a good drive), the same goes for the drive reading them.

Still, installs are a good feature (on any console). Lower loading times and less noise are always good.

SSD as a medium for next-gen consoles would be very neat, but I'm thinking that any change in format is more likely to be to straight flashmemory cards (not drives) and a built-in ram/hdd cache for improved streaming.