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A blu-ray that can read DVD's isn't the issue.  Of course a Blu-Ray drive can play DVD's (at least for a majority of drives).  The issue would be with the existing Xbox 360's only supporting DVD's.  Those old 360's with just DVD drives could not play the Blu-Ray based games/movies, and thus be alienated.  They could try an add-on for those left out, but still, that just makes it look bad to force an upgrade on the majority of your users.

I say Blu-Ray is the perfect media for the next generation.  That or some other proprietary large file size disc that Microsoft may develop/use.