I just find it silly that some people want consoles to have the equivalent of a 7970 in a package that's supposed to draw less than 200W and cost $400 at maximum. The video card itself costs that much and uses that much power! -_-
If those people want maximum graphics, get a PC. Designing a console is about making smart choices with a respectable budget so that playing a game is as simple as sticking in a disc so you get new experiences without breaking the bank.
The die space allocated to the CPU and GPU in Durango is a lot less than the Xbox 360 (which from a HW perspective was not overly complex or expensive). Xenos was 2 chips (about 180mm^2 and 90mm^2) at 90nm at launch and Xenon was about 150mm^2 (each CPU was about 30mm^2 and the remainder of die space was the 1MB of shared L2 cache and bus). That is about 500mm^2, give or take, of total die space.
Cape Verde (7770) is a 123mm^2 GPU at 28nm. Durango is fairly close to Cape Verde units + 32MB of ESRAM (which sounds like a variant of 1T-SRAM in which case it will be in the 20-50mm^2 range). So the total GPU budget is shrinking about about 100mm^2.
The CPU side is just as bad. Jaguar cores are about 3mm^2 each and the L2 cache is 3-5mm^2 (give or take) so the CPU is going to fall under 60mm^2. Again, about 100mm^2 less than the Xbox 360 budget for the CPU.
Durango is looking to cut out 200mm^2 of silicon footprint--about a 33% reduction in budgets.
The main memory this go around is also going on the cheap side; the Xbox 360 had for the time relatively fast GDDR3 memory; Durango is going with bog standard DDR3 (8GB of DDR3 can be scored easily for $50 at retail).
Someone raised the RRoD red flag but last time I checked lead-free solder is now much better understood. Further 1.6GHz Jaguar cores are low power with fairly low thermals. Cape Verde at 1GHz is also a lower power GPU (80W rated for the entire GPU) but Durango is underclocked down to 800MHz. (Side note that SRAM is better than eDRAM in regards to power as well). Durango may top out in the 100W-110W range (and thus a power brick rated for about 140W)--this is like a 33% drop over the Xbox 360 iirc.
The issue isn't so much trying to keep pace with the PC--PC GPU thermals increased leaps and bounds from the early 2000s and the silicon budgets also grew substantially. Whereas the Xbox 360 and PS3 had parts roughly similar in size and thermals compared to their top-end PC counterparts to do so today would require consoles rated at nearly 400W and silicon budgets for the GPU alone racing above 350mm^2 depending on the model.
The real issue is MS and Sony are taking big steps back in terms of hardware. Sony is doing so due to fiscal issues (they have no other choice). MS, based on talking with a MS employee, is a shift in market focus. Durango wants to capture the Wii audience and become the box EVERYONE has in their livingroom. It isn't a game-first platform and it isn't a "capture the core gamers first and fish for the casuals as a matter of consequence". This is a SKYPE box trojan aimed to extended services via Xbox Live and to get Kinect 2 w/ set top functions into the market.