They made the right choice with DVD.
1) Rising development costs basically means that aside from the games that go all out in production (LO, MGS4 and I'm guessing FFXIII), most games won't even fill a dual layer DVD.
2) Backing HD-DVD or even Blu-ray would have been real risky, because both could have easily failed. If they both went in with HD-DVD (360) and Blu-ray (PS3), the battle would have been drawn out and consumers would not want to adopt either and both would fail.
3) Increased time and cost to incorporate a HD-DVD player would have pushed the 360's launch date further back. One year head start was important for MS to make up for a lack of brand recognition in console gaming.
Where or not it pays off in the end is yet to be seen, but given what information they had and the time period, I'd say it was a good choice.
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