Can the storage also? I can already see those handheld consoles with BluRay drives or those wonderful FLASH-based home consoles. Unless you'd want to see strictly Digital Distribution, in which case fair enough.The software can be scaled to hardware spec like PC games.
Another problem is that you can only scale so much - you can lower the resolution or the level of detail, but the amount of active A.I's or game logic is much harder to adapt without affecting the gameplay. At the end of the day, the games will still push the handheld to the limit and compatibility will hold the home console back.