The great thing about dvd was that you saw immediate benefits both from the medium and the content on your _standard_tv_. You didn't need the latest lcd/dlp/plasma display to appreciate what you were getting... Now we have only an incremental increase in the convenience of the medium (saves having multi-disk sets) which really doesn't mean much for most viewers and the improvements in quality only applies to a much smaller audience.
When it comes to the new consoles, both MS and Sony have bet the bank on the television market being saturated with big HD sets that would justify an "investment" in a game console that would display in HD on them. In a few ways -- cost of game development, size of their potential market as you say here -- both companies appear to have lost track of the market, or to have projected it wrongly. Market penetration of huge HD screens just isn't there yet. Maybe it will be during the lifespan of these consoles, maybe not.
Meanwhile a competitor that tries to jazz up the game experience on "your _standard_tv_" is out there, phrasing its admittedly not-cutting-edge technology in ways that DO mean something to most game players.