I think the main reason it exists is because helix won't support discs. This is a way people will be able to digitise their existing physical collections using their old consoles before they upgrade. So they will still be able to play their disc games on the new digital only console.

This is a way to carry your physical collections with you into the all digital future.

So basically kinda-sorta how physical versions of Game Pass games work, but for all games. The game is still on the disc, but you also get the option to obtain a digital copy. Just like how I don't have to stick my copy of the MCC into the disc drive to play some Halo since I have GP, if I put my copy of Mega Man Legacy Collection into my Xbox, I can redeem a digital version so I don't have to use the disc if I don't feel like it. You can just install it, get the digital license, and put the disc back in its case for safe keeping. But unlike GKCs, the game is still on the disc, hence the "your physical disc continues to work exactly as it always has" language.

Considering they are announcing this now, it seems like Xbox is still planning on supporting disc-based games for a good while longer. I mean, I doubt they are just going to have this program on one platform and then up and abandon it next generation. The Helix will need a disc drive, even if only as on option, for this program to continue into next generation. And while MS has done some dumb stuff with the brand, one thing they've always done well is supporting backwards compatibility. Hell, if they continue to support BC for 360 games and even some OXbox games, that would also need a disc drive for BC of physical discs.

If MS truly is continuing to support physical games next generation, I'll definitely save up to get a Helix.

Sony is beating XBOX badly, so they really aren't losing anything by not being more conscientious here.  

I believe its the opposite, as posted before by me and others here, to me the conclusion is they are moving full digital too, and this is the way to carry some of your "legacy" physical library foward to the digital only world.

We'll have to waiy and see, but it sounds way more likely to me than showing support to actual physical games, which they have already dropped completely here in Brazil for over 3 years now, for example, and they keep shipping completely unplayable games on the discs for a good while too, you either have to download most of the game from the store anyway, like with Forza Horizon, or you have to download an update to allow the game to be playable because they ship it with a hard lock that only unlocks online in the release day, like with the Halo Remake just released.

They have already effectively dropped physical media way before Sony, they just didn't announce it before doing it gradually over the years.