I really feel that this is what MS will have to do in order to keep their games relevant to competition. While DVD-9 may have been enough for the first few years, it is becoming ever more clear that developers can't cram all they want on that limited space. The main reason I think they may be going this way is with HDD sizes increasing each year and this is really the only solution I can see that will enable them to push games further on 360 than they are now (combined with better/refined engines of course).
The other hardware, such as CPU/GPU, is fine. This is the only major bottleneck I still see.