The massive reduction in cost of hardware has enabled every device to get smart. And, surprise surprise, the first things to get smart were the things with screens - phones and TVs.
Video game consoles (and all set-top boxes) hearken back to an era where the average house only had one TV, and it was dumb.
These days, there's a dozen screens in the home, and all of them have computing power many times greater than even the original XBox - more than enough juice to power a huge catalogue of existing games.
So why do big game companies (Sony, Microsoft, Nintendo and now Valve) still feel they need to make hardware?
And I'm not suggesting that these companies give up their 1st party platform advantage - just that their platform doesn't need to be hardware anymore. A cross-platform Nintendo App that runs the Nintendo VM and stores all of your games in the cloud makes a lot more sense than building a second rate piece of hardware and managing the supply chain to get it to the living room.
The only area where you can argue hardware is still necessary is the controller - afterall, our hands haven't changed that much and immersive gaming experiences haven't adapted well to touch screens. But surely it'd be easier to manage a supply chain for bluetooth controllers than it would a console.
If you add cloud graphics processing to the mix to overcome the horsepower issues of lesser hardware, something NVidia and Sony have both demonstrated at this point, then there's absolutely no reason to continue to push hardware other than inertia.