Nintendo signed a deal with Panasonic to use DVDs in Project: Dolphin. They modified the format to be a propietary mini-DVD format later on. Panasonic gained rights to make a DVD player version of the GameCube.
But the GameCube discs are still basically DVD (albiet mini-DVD). Pirates have burned GameCube games on DVD discs that run just fine on a hacked GameCube. The system can read DVD discs because really it is a DVD drive, they just tacked a few modifications onto it. If it was a truly, completely propietary format, this would not be possible (ditto for the Wii "disc drive").
Nintendo could do something similar with Blu-Ray ... yes saving $10/unit in licensing fees is great. But that doesn't stop Nintendo from offering a $30 dongle for to "unlock" the movie playback (they come out $20 on top that way). This was the original plan with the Wii, but I guess by 2006 it became pointless with DVD. That way they actually stand to likely make a profit off anyone who wants to play movies on the system.
For the flash memory idea ... why not just reserve a 4GB high speed pool of flash RAM onto the system itself for game data? That probably makes more sense than making every game use flash.
