If they included they might have lost the console war.  MS has said time and time again it would have made the 360 more expensive to include it.  Don't think MS ever cared about physical media to begin with so I think it made perfect sense for them.  I think their approach hasn't hurt them 1 bit so far but the same can't be said of the PS3 yet.

"I think there actually was very little risk"

Apart from the xbox, Microsoft is heavily involved in HD-DVD. They made much of the software and designed the interface language, they sold addons to the xbox and we don't know how much of the money Toshiba must have lost with its ridiculous cheap players and its 150mio checks came from Microsoft since they are both in the board.

So yes it is bad for MS to loose HD-DVD. They kept the xbox out of the fire that is correct. But that doesn't mean they didn't loose anything. At the moment HD discs are no big deal but if they really succeed DVD they are a far bigger business than game consoles and the people controlling the standard are rewarded handsomely.

@mikeb

On the PS3 it might be crucial to have the extra space due to the speed of the blu-ray drive and being able to do more like 7.1 audio but the same can't be said of the 360 at least not yet. Once we see a game being cancelled or being offered on the PS3 over the 360 based on the physical disk limitation then I agree with you but untill then is just assuming. Just like technology evolves to allow for greater things it can evolve to allow more things with less etc. So far the 360 has a nice lineup for 2008 so really nothing to worry about anytime soon. If it becomes an issue we will surely here about it though it has to be from people actually working on the 360 rather then people who only worked on the PS3 and feel they needed all the space etc. Time will tell.

"If they included they might have lost the console war."

True. Besides 2005 they couldn't have done it anyway there simply were not enough blue diodes around at that time.
Doesn't change the fact that they played it safe and lost.

@ elnino334

Sony designed to PS3 from long term perspective. I personally think the 360 will hurt more for the long run by not having a higher capacity disc format by default, resulting in widely known about gaming sacrifices. (exclusives like Forza 2, multiplatform games like GTA IV) This will of course also hurt PS3 multiplatform games (sacrifices, like early multiplatform Amiga games weren't ambitious enough beyond the Atari ST's technical abilities), likewise but to a much lesser extend the lack of a default harddrive for the 360.

With regard to Sony as a company, they still sell the profitable PS2 which is beating the XBox 360 sales the last couple of weeks as well. (Why didn't it before? Well maybe because according to analyst 90% of current 360 owners upgraded from the discontinued XBox and the PS2 is far more facing market saturation)

How is Microsoft 'heavily involved' in HD DVD? They made an add-on, with the belief that if HD DVD won, they could integrate the HD DVD into an Xbox 360.5 of sorts, built by Toshiba. However, after the Warner defection to Blu, MS put the brakes on it - and will keep supporting the HD DVD format as long as there is one.

It's an add-on which requires very little support. It is by far the fastest HD DVD player on the market, because it utilizes the 360's processing power. The standalone HD DVD players don't have that, hence the longer load times. If the format fails, guess what? It does little to affect the Xbox. It can still support the add-on - or without it.

Sony decided to tie the PS3 to Blu Ray forever. If HD DVD won, you would have a system tied to a failed format. It wasn't a risk MS was willing to take. They are in the business of making money - and yeah, they release duds, but not that often.

Sony, on the other hand, could care less because they know someone out there will buy their crap, regardless. 

@MikeB

What limitations did Turn10 say Forza 2 faced? And with regard to GTAIV, it was my understanding that the primary cause for the delay in the games release was programming difficulties with the PS3 and it's lack of sufficient usable memory?

I know you didn't just try and compare 360 sales vs. the PS2 sales ...

That's like comparing BMX sales vs. Harley Davidson sales. Yeah, both are bikes, but one has a bit more power, and is current generation vs. something that is purely last-gen, hence why Sony dropped BC, right?

MS gives gamers choices with the 360. Sony doesn't. There's no way you can buy a PS3 without wifi, HDMI, a hard drive, a Blu Ray drive. You have to take it or leave it. If my 360 goes down, I'll just buy an Arcade and be done with it. I enjoy having a choice especially when my money is involved ... 

Additionally, given that a number of developers have come forward to comment on the PS3's insufficient RAM and accessible memory, do you view this as a fundamental fault in Sony's "long-term" vision for the PS3? When they were trojan-horsing their proprietary disc format into the console and their custom-designed chip set, did they simply overlook RAM in a rush to get the console to market in the face of Microsoft's head start?

Surely a fundamental flaw in a consoles raw power isn't nearly as surmountable as an issue like disk space, which can be rectified through multiple disks, downloads etc. It's not like gamers have a history of rejecting multiple disk games.

I agree on the first sentence. The second statement I am going the wait and see approach though I am leaning towards not being an issue.  Looking at DMC 4 and Burnout paradise both being developed with the PS3 as the leading console seem to be just fine on the PS3 and though we don't have reviews seem good on the 360 as well. I mean there could be a point where we will see a major difference etc.

In terms of SONY I figured you would know that the PS2 out selling the 360 is nothing new since the price difference and games library is far better for the PS2.  At least the 360 out sold it for the year 2007 vs the PS3 not doing so.  I just don't see why you want to compare the PS2 to the 360 stating the obvious in that the PS2 is profitable. Was there a point there?