I am certain console gaming systems will not replace PCs.
Consoles are good for two things:
1. Cost advantages from being stripped-down boxes soley for playing games.
2. Uniformity: games will play effortlessly on a single system without the developer having to worry about the endless different configurations of PCs
Disadvantages
1. Useless for doing anything productive.
2. Quickly becomes obsolete and cannot be upgraded.
3. Rigid software making it very difficult to customize to individual's needs.
As others have said, though, this thing is supposedly poised to do most of the low-end computing tasks that home users typically use their PC's for. And at 300 bucks or so, which is the number I've seen cited elsewhere, it's priced so you won't feel too bad about buying a new one every couple of years. And CNET reports that it'll be compatible with the new Longhorn OS, so somebody is thinking ahead.
I think it's too early to tell, but this thing might have potential as far as making inroads into the home PC market.