Why would microsoft not go with blu-ray?
It's a well established format by now, disks are cheap to press. A new format or reviving HDDVD would require to retool factories again to press the new disks and make the drives again.
Why would Microsoft not offer blu-ray playback when Sony does. It's just one more thing you can advertise on the box. It won't take sales away from the Zune movie store, Netflix does that much better and they allow that on their console.
Microsoft might reserve a part of the disk again for drm, but making a whole new format doesn't make any sense.
What I can see happening is that they'll offer a cheaper digital distribution only sku next to a premium model including a blu-ray drive. It seems the right time to experiment with digital distribution of full console games on day 1 as steam does, but too early not to offer the option to go the old route.
It will be interesting to see what happens then. Will it go the same way as movies? So that you can download a slimmed down version of the game for less without extras, 1 language, and more compression on sound and fmv. Or buy a premium version on disk with uncompressed sound, high bitrate fmv, making of videos and other extras.
