[quote name='Scrubking']Everybody seems to be missing the point.
As technology continues to advance ALL consoles should be getting smaller not

ing bigger! Yet the opposite seems to be happening.[/QUOTE]
Just like every other high performance semiconductor product, the demands for increased performance move at a faster pace than the technology.
Products like the SNES were not terribly ambitious for their era. The manufacturing process was in use for a few years already and none of the chips pushed the edge on the number of transistors or clock rates. It wasn't until the Dreamcast and all consoles that followed that designs were planned around production technology that was yet to be used for mass production.
It can be counter-intuitive. High-end processors use lower voltages than their predecessors but the power they draw has only increased. Intel recently had to change their product strategy because they hit a power and heat barrier to their policy of pushing for ever higher clock speeds. One of the big problems with the manufacturing processes that allow chips with transistor counts in the 100s of millions is power leakage. As the wires get tinier it more of the electrons just wander off on their own instead of staying on the path. That generates waste heat and requires yet more power, albeit low voltage, than ever to drive these chips. Some new technologies like innovation in insulation layers help but only a bit.
The thing to remember about the tiny PStwo is that it would have been physically impossible to produce in the year 2000 without including a refrigerator for it to live in. The cutting edge tech then was .18 micron. The PStwo chipset is the result of using a much smaller process (.13 micron IIRC) and integration of the EE and GS into one package.
Now, Sony had two ways they could go with that. If they were looking for a performance upgrade they could see how much more speed this smaller chip would allow with the same power draw and cooling support as the original chipset. Which would be fine if they were making a PC but this is a console. Staying identical in performance to the installed base was a requirement, so instead they ran the new chipset at the same speed as before and got something that drew a hell of a lot less power and generated a lot less heat, making it possible to package it in a tiny package. (Note that this also required making the power supply external and eliminating the hard drive bay for much of the reduced volume and cooling.)
The PSP and PS3 (and Xbox 360 and almost certainly Revolution) use an even smaller 90 nanometer process. The former has to take a PS2 level of performance and make it viable for a battery operated handheld and the latter has to push the cutting edge of processing power in a mass market package. So the PSP runs relatively slow by today's standards to have a low power draw (and not become to hot to hold) while the PS3 runs as fast as it can without having a power supply as big as your head. The PS3 will probably have a good sized external brick but not excessively large. This is why reports of the Cell running at well above 4 GHz did not translate into a PS3 of that speed. The power and cooling issues would have been the same as a top of the line PC.
(It was Nvidia's unwillingness to develop .13 micron versions of their Xbox chips that made it impossible to do a major redesign of that system. Intel has long since shrank the Pentium II to that size to get its speed up to 1.4 GHZ. Running it at the Xbox's 733 MHz would make it very power efficient and require only a small heatsink for cooling.)
Every big semiconductor manufacturing company is currently gearing up for 65 nanometer production with 45 nm on the horizon. At 45 nm it may be possible for the PS3 and Xbox 360 packages to get a lot smaller but those versions of the chipsets are a few years off.