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I don't think physical media will ever disappear.  I think people will always be split about 50/50 on what they prefer.  Just look at CD's.  They have been around since the 80's and they continue to make enough off of them to warrant releasing more.  Movies will be no different.  The physical media will evolve until there is no more benefit in making it better (i.e. the picture quality and sound can no longer get better), then it will stay around for a long long time.

Honestly, I think MS was hoping digital downloads would take over so they wouldn't have to either pay a licensing fee for Blu-ray or not have to create their own HD format to avoid those same fees.