"Having chosen to back the wrong horse in the form of the failed HD-DVD business, Microsoft's position on high-definition movie and TV content currently revolves firmly around digital distribution."
So basically, they're saying "Yep, we picked the wrong one last time. But instead of backing (what proved to be) the right horse, we're going with something else. You can trust us this time, it'll be ok."
The problem with digital distribution is simple. Hi-def movies take alot of space. A 24 minute episode of Xam'd from PSN (in 720p HD) takes up 1.53 GB, and they're talking about 1-and-a-half to two hour long movies. An entire movie is somewhere between 5-10 GB. Most people just don't have the space on their Hard Drives to have a decent sized hi-def movie collection that sucks up that much space. No to mention that (inevitably) when higher resolutions are created, they'll take up even more space. When that time comes, Blu-Rays will still have enough data storage.