I don't see Sony removing Blu-ray from PS3 until it's blatantly obvious that the format is failure - and by that time it will probably be too late because it would kill backwards compatability with all the games released up to that point.
MS powering up the 360 could happen but I don't see it adding a standard HD-DVD drive any time soon since Blu-ray doesn't seem to be a selling point for PS3. A bigger hard drive or HDMI, maybe. The bigger hard drive goes with both companies' ambitions to create a set-top box.
Honestly, I think both companies are too focused on competing. It's all about one-upping each other: more power, more features, more marketing, more money. Even Microsoft's somewhat admirable attempts to fill in gaps in its game lineup are focused on competition: Blue Dragon is a direct shot at PS2's strongest genre. For all the money and effort put into that game, it will probably take a loss and it won't convince anyone that 360 is suddenly a better system for RPGs than PS3.
Meanwhile, Nintendo is looking at how to make the gaming experience more pleasing for consumers. Some hardcore gamers aren't impressed, but tons of non-gamers are. The challenge isn't to outdo Sony or Microsoft anymore, it's to please the customer. For Microsoft, it doesn't matter if only 15% of its customers actually want an HD-DVD player, it must have one just to compete with Sony. For Nintendo, basically 100% of its customers want the Wiimote, and if Nintendo creates a feature that not everyone wants, it's dirt-cheap (like the Weather Channel or the Opera Browser).