I don't see d/l replacing discs just yet. At least not legal, paid for d/ls. People often want to be able to watch a movie a few times over a thirty year period. You could rely on a dvd lasting that long, but not a hard-drive.
I'm sure things will progress as d/l speeds pick up, and the internet becomes more deeply intergrated into everyone's home entertainment systems, but bl-ray still has a chance to dig in before then.
For me, blu-ray is still competing against DVD. So long as blu-ray discs cost so much more than DVDs, it's not going to be worth my while to switch. I've still not switched to HD, and see getting a surround sound system as a far more important upgrade to HD anyway. For watching films and programs not designed to be viewed in HD, the new format is just as likely to highlight faults as it is to increase enjoyment.
But still, the decline of HD is a big win for sony and the PS3. I think the PS3 will now come to dominate the 360 over the next year, with casuals seeing its ability to play blu-rays as a significant bonus, and having enough attatchment to the playstation brand to not be overly worried about the lacking games lineup.
Whether this will lead to developers devoting the resources to the PS3 to create a truly impressive games library, and how long this will take, I don't know.
I bet microsoft have stepped up plans for the 360 replacement though.