I would think they would have to move to blu-ray...seeing as next gen system will come no later than fall 2012. Im willing to bet HVD (holographic video dics) will not come out that time due to cost.
As graphics technology improves so does the amount of data used to store them. Look at most of the recent AAA offerings .... Final Fantasy 13, God of War 3, Uncharted 2. All of those games exceed 30GB of data. I think thats why the xbox360 has not have a game graphically comparable to that of the ps3. The problem with dvd is compressing data causes it to lose quality. With blu-ray you dont have to compress data because u have a limit of 50gb.
Digital distribution is just ouf the question for now because of the download speed. The average internet user i would assume have the budget internet $40-60 a month at 6-15mbps.
Sorry but you're talking about something you don't understand, there is such a thing as lossless compression for a start. Crysis which is still arguably the technically strongest game out there came on a single DVD, kind of blows your theory out of the water.
By the way you do still have to use compression on Bluray too because if uncompressed the file sizes would be too big to be streamed at sufficient speed to stop pop in issues. The only reason you lose quality in compression is if you make the easy and lazy choice when you compress, there is many other workarounds that don't cause a loss in quality.
There are quite a few 360 games that are comparable to the PS3 exclsuives, you would have to be really blinded by biuas to try and say there is some sort of generational gap between the two. They're referred to as the HD twins for a reason on this and many other sites.
Digital distribution is perfectly viable for many areas around the world and it will be a feature Microsoft push on their next console but it will not be the only distribution method for games, I suspect Bluray will be included for its multimedia advantages.
@Heedstone - thankfully businesses don't work like your strange mind seems to. Sony don't own Bluray anyway so they cannot determine who gets a license or not. Secondly if Sony for instance were rather stupid and somehow managed to throw out an application by Microsoft then what happens if Microsoft turn round and refuse to sell Sony OEM copies of Windows. At that point all Sony computers then have to come with a premium to cover the extra OS costs. Neither scenario is going to happen though as its better for both to make money off each other than appear unproffesional in the worlds eyes.