My first reaction was, this would never happen- but the real question is will systems ever reach a level of power that is good enough to stop at? If you feel that there is some point of processing power/graphics/sound etc beyond which improvement is so slight as to not be worth pursuing- the final game system if you will, then it would only be a matter of time until that technology was crushed into a portable format. And that portable system, so long as it could provide the identical experience as the larger console and could output to a large audio/visual experience, would become the most successful.
BUT, if you think consoles will continue improving indefinitely, which each generation representing a leap from the previous, I do not see portable gaming ever replacing console gaming.
To me, I see portable gaming as a substitute, not a replacement. I am in a situation where I cannot game on a console, so this portable device will do. The psp, or any other portable system will not be changing my mind, and I imagine the majority of gamers feel the same way that portable gaming, first and foremost is always about portability.