The disc only need be in the DVD tray to confirm that a licensed hard copy of a given game is present.
MS already specified that.
This is EXACTLY the same as most PC games these days.
I see two problems with this, followed by the obvious upsides. This really doesn't benefit the majority of the 360 user base which is the 20GB SKU, followed by the Arcade.
13GB is about enough to hold 1-2 single disc games copied completely to HDD, running the unlikely assumption that the HDD has absolutely no demos, XBLA purchases, or Xbox Classic games installed.
This really only benefits the 120GB SKU owners although now that MS has wisely upgraded the standard HDD to 60GB, all FUTURE 360 owners will be able to choose to use this complete install option practically.
As for current 20GB owners, it's not practical.
Downside #2 that everyone seems to be ignoring: it takes a considerable amount of time to do a complete disc image copy to HDD. We've already seen the volume of complaints regarding mandatory 8 minute installs on the PS3 from people that don't even own the system. A complete game image install takes a good 2x longer with no promises on how much better current games will actually perform, seeing as how none of them have been optimized for HDD playback.
All current games are specifically coded to run off DVD. That has been one of the big restrictions of developing for the 360 platform.
While it is practical for a game that will see heavy and constant use, this is not something the vast majority of users is going to do for every or even most games that they purchase, not even taking into account the HDD space limitations for those with libraries in the 10 games or more range for example.
When it comes to multiple disc games, then it really becomes impractical. We have people delighted by the fact that they'll be able to do a complete game image install to HDD for FFXIII (in 2010), while overlooking the likelihood that the game will be published on anywhere from 4-6 DVD9s.
You're looking at anywhere between a 30-50GB complete install. It won't fit on the current standard 20GB drive.
As for the upside: future games that are coded for playback from HDD should be able to perform significantly better.
It will not eliminate load times (same as PC games).
It will reduce wear and tear on DVD drives, although worn out DVD drives seems to be one of the initial problems that have already been worked out of the manufacturing process, which was more of a part sourcing issue due to using inferior drives.
It will eliminate DVD drive noise, which is something that can't be "fixed" due to the 12X read speed, which is only an issue during volume data loads; it's not constant.