While this is true, I don't think (at least I don't recall it as such) the original Xbox was marketed much as anything other than a games device. I believe that both Sony and Microsoft are engaged in a battle for consumer's time, to the extent that they really don't want you turning off their box to spend moeny and attention to another one. While DD is certainly coming (I don't think that DD only is entirely advategous to consumers, but that's just my opinion), for the close (meaning about ten years) future, disc formats will be entirely relevant.

Blu-ray may be largely irrelevant to gaming, but to ensure that people stick to your box, and your box only, I do think it is necessary.

I don't think Microsoft minds paying the licensing fees - after all, Sony is part of the group that owns DVD, and that didn't stop them from using it as a format this gen. The only thing that could stop them is wanting to have control over what you are able to watch on your box, and who you are able to buy it from. While that is possible, I'm not sure it is likely, given the previous argument of then giving up time and attention to other hardware manufacturers.

The next two years should tell us what they'll go with, until then we can only speculate (and amuse ourselves with internet arguments).

i wouldn't mind blu-ray although ive really got into downloads and all recently, not having the physical game isnt actually that bad, i still feel a sense of ownership.

And didnt MS say once that they defiantly weren't going to use bluray or was that just my imagination?

I'm pretty sure you misinterpreted some PR, they have made reference to not needing it on the 360 but they have never outright said it wouldn't be a consideration in the future, at least not yet.

my mistake, although with MS dismissing bluray this gen and nintendo not using it in the wii U then i'd say MS will probably go download only next gen or atleast find an alternative format to both dvd and bluray 

There's no reason not to use Blu-ray, and there's plenty of reasons TO use Blu-ray.

1. They'll need more disc space next gen. That is a given. They can either go with Blu-ray, create an expensive proprietary format, or go with another new format like HVD. New formats generally come with significant costs. It's either Blu-ray or a $599 Xbox.

Of course, they could go with a blue laser variant that's very similar to Blu-ray, and thus would still be relatively cheap, but why do that when...

2. The Xbox is designed to be a multimedia device. Every multimedia device with a disc drive will have a Blu-ray drive by that time. Hell, they all do now. Microsoft will want the new Xbox to stand over and above other multimedia devices, so it'll have to include every major feature found in those other devices.

I don't understand why the alternatives are perceived to be prohibatively expensive - isn't Nintendo doing the same thing? Surely the Wii-U isn't rumoured at $599?

There are other reasons not to use Blu-ray;-

1. Stop piracy.  How many computers will have a HDDVD burner?

2. License fees.  I think I remember reading that the BDA charge $30 per device - this has probably gone down now though.

3. Streaming data speeds.  Although you can get 12x BD now, much faster than the 2x in the PS3.  They may choose to go for USB, but surely this would be very expensive. 

Nintendo is still using a variant of Blu-ray.  Unless it's some magical new disc that just so happens to be 25gb in size and also uses blue laser diodes.

It's just like how the Wii uses slightly altered DVDs.

There will absolutely be added costs associated with the manufacturing of HD DVD drives solely for a new Xbox, as well as the refitting of DVD production lines to manufacture HD DVDs, and the format still has licensing fees of its own.  You'd have to take into account those expenses on top of the disadvantges not including a Blu-ray player has (a media center device that can't play Blu-ray in 2013?).  It's just not feasible.

I believe one of the main advantages of HD-DVD was it didn't requie a lot of retooling of manufacturing plants like Bluray did.  Not saying I think they'd go that route but creating the disks isn't an issue, the supply of lasers and drives on the other hand would be an issue if they were tied to one drive manufacturer.  Not sure I'd like to be reliant upon Toshiba drives, they're hardly the best drives out there in my experience.

simply put it won't happen.

When both formats were initially being rolled out, HD DVD did have that advantage, given it is a red laser-based format just like DVD.   However, economies of scale have made Blu-ray the much cheaper alternative today, given hundreds of thousands of drives and millions of discs are being produced on a weekly basis.

HD DVD would be a relatively cheap alternative to any proprietary format Microsoft could come up with, or a new format like HVD, but it would still be more costly than Blu-ray, and why go down that road when you can just include Blu-ray and check off another box on your feature list compared to the competition.

It's the same reason the PS1 used CDs, and the PS2, Xbox 360, and Wii all used DVDs.  Looking at Nintendo and Sony, they only go the proprietary route for their handhelds (aside from Nintendo's earlier consoles), as that's a necessary evil given the nature of the business, but even the Vita will be using a flash-based cartridge.