In the long run I believe that physical media is doomed ... In the meantime, I would say that disc based formats will remain dominant and slowly lose appeal to digital distribution. Blu-Ray itself will probably not be a replacement for DVD, but that doesn't mean that physical media (in general) is a bad idea at this point in time.
Personally, I think Blu-Ray's appeal would have been far greater had they waited until 2008/2009 to release it and if it would have been a flash-memory based format. If your spec is well crafted, there is a lot more potential for "forwards compatibility" from a memory based format than from a optical disc format; and, with how big portable media is becomming, being a smaller portable format would be a massive advantage to most consumers.
