Hi! I think I would consider putting art in either of the niches. Here is an idea:

http://deciture.com/shop/decor/world-market/norman-wyatt-culture-shock-panels-set-2/

Hope this helps!

Hi kmbeno -- Here's my first thought -- paint out the upper niche in the wall color and find the perfect "thing" to make sense of it being there, then take your counter tile up the back walls along side the FP, unifying that area so it's a bit less choppy than with that third accent color. Some lighting and glass shelving might make sense there, depending on your use. Cursor over for wide view.

I would paint the cabinets white to match the trim in the rest of the room. Then paint the upper niche in the same color as the rest of the wall. You can put art in it; either one long piece or three matching pieces. As far as niches on both sides of the fireplace go, I would paint them too and install some white shelves. Let me know if it helps.

Depending on how you intend to use that space there are plenty of options to toy with before you start on the project.
1) paint cabinets, repaint the walls, add recessed lighting and display art that you love.
2) all of the above and add some shelves : display art in the upper niche.
3) completely remove the cabinets and and play from there - long vertical niches from top to bottom ( the upper one completely closed with drywall).
4) add some all paper to the niches after you re-do the cabinet, paint the surrounding wall
5) cover the upper niche with drywall and just keep the side ones for art, decorative object display
6) remove the cabinets , add shelves from top to bottom and use frosted glass doors and you get some storage area for dvds, wine glasses etc.
7) remove cabinets, create one or 2 drywall shelves with recessed lighting and you get 2 or three niches and completely cover the upper one (or the part that sit right above the fireplace)
8) use tile instead of wallpaper to decorate the inside walls or different paint colors or venneer stone

A mix of the above And so on.
I'd take my time to decide what would be the best use for that space. Once you determined this it's going to be much easier to visualize the design .

Which is the color palette you want to work with?

You could play baseball in the living room and try to hit over the green monster?