Microsoft's Xbox & Entertainment Director, Stephen McGill has questioned the relevance of Blu-Ray, saying that digital distribution makes the format all but obsolete.
Blu-Ray might have beaten HD DVD when the two formats went head to head, but according to McGill, Blu-Ray is still the loser overall. In his opinion, digital distribution and streaming makes Blu-Ray's victory pointless.
McGill said that time had shown that Microsoft's decision to stick with DVD and thus keep costs down had been a smart one, and thought that people were ignoring Blu-Ray in favor of downloads and streaming. He said that Blu-Ray was going to be passed by, and that rather than support it, Microsoft was offering Blu-Ray quality downloads instead.
There's some truth in what he's saying: digital distribution is going to take a pretty big bite out of the sales of physical media, but videogames are a special case. Surveys have shown that most gamers prefer a physical copy of a game over a digital one, and that attitude will be slow to change. The follow up to the 360 will almost certainly have a disk drive in it, and it's getting to the point where DVD is just too small.
Source: Xbox360 Achievements