Can it happen on the Xbox?
I've spent several months, umm... "researching" this very problem with Everquest II on the PC. Most aspects of an MMORPG can be done quite easily on a console. The environments, the skill system, adventuring, and even a continued evolution of places to explore (e.g. downloads from Xbox Live).
Halo 2 has shown how clans/guilds can work. Games like Morrowind and Ghost Recon (2) have shown us rich environments. Heroes, Morrowind, KOTOR have all shown varying complexity of skill systems.
But: all of that is simply gameplay action. What makes an MMORPG unique is having others there with you. Living in the same environment, (sometimes) competing for scarce resources, and interacting. With further elimination, you realize that the "living in the same environment" is also just gameplay. The existing MMORPGs have shown that it is technically possible. Cool.
Interaction is the key problem that consoles are going to face. On a PC, the MMORPGs all use an IRC-like system for communication. You have public channels, guild channels, auction channels, and many more. You type in whatever you want to say, over whatever channel. If a dozen people write in at the same time, you get nice little lines in your chat window for whatever each person types.
Consoles? Oops. No keyboard. You've got voice input, and you might have key phrases/emotions trigged from your controller. But no real text input. If game makers try to build an MMORPG, they will need to figure out how ten people can all talk at the same time on a (voice) channel. It won't be pretty.
But don't despair. Games like Rainbox Six have shown that voice recognition works for simple phrases. But this next generation has got some serious hardware. Why not dedicate one of those processors to voice recog? Translate your statements into text and drop it onto the target channel. When you're out adventuring with a few of your friends, fine: keep that a voice channel. But the guild? The world-wide auction channel? Voice recog, baby.
It can happen. It can work. Not on the current generation of consoles, but the next? You bet.
Now I just need to figure out how to get that two solid month sabbatical that I'm going to need. Need.