What gets me the most is that (as a PS3 and 360 owner) if you take out the cross game voice chatting and invites, the actual online gaming in terms of server side/technology, number of players, lag and so on has consistently been better for me on the PS3, and equal on most multi-platform games. That's partly because of the games I've played of course, but it's still ironic! For all the work Microsoft has done getting great racing games out there for instance, why couldn't they manage to bring one out using more than a pathetic excuse for an 8-player peer-to-peer network system that can't automatically configure itself properly (UPnP2) and breaks whenever two people out of the 8 haven't completely opened up their security for the 360's connection? It's not that I believe it's unsafe to open up that connection, it's just that you have to do it in the first place! Messing around with the settings in your router/switch/cable modem just isn't any fun. It pisses me off, and it's just the kind of thing that needs competition to get sorted.
Conversely, if it wasn't for Forza 3, GT5 Prologue probably wouldn't have been released in Europe and GT5 proper probably wouldn't come out before 2012.
Also I consider motion controls and pen-interfaces one of the most important recent innovations in gaming. It wouldn't have been the same if Nintendo hadn't attempted it, and they even partly because they felt they couldn't compete in terms of hardware with Sony and Microsoft so decided to take it into a new direction altogether.
Assuming that we need the general principles of competition to keep this thing moving forward, then I can think of a few alternatives, but so far I don't think they'll end up working.
For instance you could have all the developers/publishers choose a new hardware supplier every five years. Ditto for a new software/sdk and services supplier, and maybe even separate peripheral supplier. But considering that the other suppliers then won't have income for 5 years, that's just not going to work.
And even then, it silences consumers on an important part of the competition input, when maybe some of them aren't interested in HD content, others aren't in online services, others want to spend less on hardware or software or both, or just more, etc. etc. etc. While I think you may be able to find a model that works, I don't think you'll be able to find one that can work as well as the current model.