By the time the next console comes out the licensing fee for BR will be cheaper.  When Windows XP came out it did not have DVD drivers.  You needed to buy 3rd party drivers like WinDVD.  Microsoft did this because they didn't want to pay for the licensing fee.  Years later the fee has come down and they include it in Media Player.  

Whenever the nextbox comes out not only will the licensing fees be cheaper but the drives will be cheaper as well as the cost to manufacture discs.  If Blu Ray continues to grow it will be expected to have support right out of the box.  MS will want to be at least on par with their competitor.

MS is going to try to create the single box that you connect to your TV that does everything.  Play games, DVD/BR movies, streams, etc.

I know there is some work on expanding the standard DVD size, but Flash Memory is also a promising alternative, and my preferred media over disc, since they don't get scratched. Currently, a 16 GB can be found for cheap, but still more than brd disc in bulk. I think alot of people are working on alternatives, since there is ALOT of money to be made...time will tell.

Right.  The irony is that Sony mocked the industry because MS & Nintendo didn't have Blu-ray.  The really believed it was the wildcard that would push them to victory in the console war.

It's really hard to know what is going to happen, but I do know that all 3 console manufacturers have been putting serious thought into it already.  We all know that MS claims they started preparing for the next console generation the day after the 360 was released, so it's no doubt that this has been the subject of great debate in Redmond, WA.

Really, who can know what the bandwidth capabilities will be in 3+ years?  I get a full 3mb download speed for $17.50/month through Charter now, so I can only imagine as Fios starts to take over that the speeds will jump 10 times.  I worked at Verizon years back with the Fios team, and we were easily sucking 20+ meg download speeds in tests, and that was back in 2004.  By 2012 it will be just sick.

I think MS is betting on the horse that by the time Blu-ray has a chance to overrun standard DVDs, streaming media will take over as the format of choice.  That actually was the purported reason that MS didn't throw its full weight behind HD DVD to begin with... the rumor was that later in 2008 streaming media would be coming to the 360 and that their mediocre support of HD DVD was just there to prolong the format war against Blu-ray until they could perfect streaming media.  Looks like that rumor was true, as the Netflix streaming service via the 360 is awesome.

You definitely can get this kind of speeds but it's not going to be available for the masses that soon. We need another generation for this to happen.

I think flash memory would be a great possibility, but then it seems like it would be too easy to pirate, or perhaps too easy to corrupt the data by popping the flash drives in and out all the time.

The benefits of flash storage, though, would be:
Size: could fit 16GB of data on a 2 inch device. makes having a large collection of games much easier to organize
Speed: great data transfer rates using either SD or a USB flash drive.
Cost: low cost, as you said already.

The only other negative I could see is that right now flash media is topping out at around 16GB for USB flash drives. Perhaps in a year or two this number could have doubled or so, but that still leaves Blu-Ray with a data size advantage. I'm really not sure what they will use, but it's really a toss up between Blu-Ray, flash, HD-DVD, and downloads at the moment.

I don't think it will be all downloads, because not everyone will have fast enough internet and many people like to own the physical media, plus you can't "resell or trade" downloaded media so the used games would no longer be available.

I agree.  I think 6mb download speeds will have to be the standard rule rather than the exception before downloading games becomes the #1 format.  I really hope it starts to take hold by 2012.

And I do agree that tiny flash media would be best if they can make it cost effective by then.   Maybe to prevent data corruption, they could make a digital button that would unmount the OS from accessing the flash drive prior to it poping out of the flash drive or something?

 http://www.memorybits.co.uk/index.php?cPath=764&sort=2a&filter_id=263

Big enough for you? Only problem is cost, but that should decrease vey quickly.

I don't expect to see the next round of consoles tell late 2013. By then I see no reason why Microsoft would need a disc drive in the system. They have never supported Blu-ray, and their would be no point in doing so in the next generation. Microsoft will very likly just turn the next Xbox into a fully Digitaly system.

I think they will still cap the amount of space developers can use. Even with the speed of the internet at that time, and the larger size storage mediums it would be hard to see a download over 25 GB. It also is very dependent on how ISP's are going to react to huge amounts of downloads. The next Xbox will surly have IPTV, Movie/TV streaming, Music, and Games. That will add up to a lot of data being moved each month, even by a less tech savy family. In the US it may not be to bad with Comcasts 250GB cap, but other countrys in Eu, and Austrailia have caps around 25GB or less. Unless something changes ISP's could end up forcing MS to use a disc.

Another thing that may need to be taken into consideration is what Sony is going to do. So far we have not seen the differance in storage capacity cause any issues with the current generation. Over the next few years the problem may pop up, and we may see games like Madden, NBA 2K, Call of Duty, Grand Theft Auto, and more utilising more than one disc on the 360. Some say this is no problem, but I think games like Madden and NBA could see nice gains in all aspects if the Blu-ray storage capacity was taken advantage of. If these games were on 2 discs that would seem a little out of hand.

If Sony comes with a PS3 that supports 400GB Blu-ray, then Microsoft will probably need to look at a way to get big games out on some kind of phyisical medium. Even if the next Xbox had 2TB of built in storage, that is only space for 4 or 5 epic experiances. If you don't believe that we will need that much space next gen just think about this. Both systems will be looking at 4GB of RAM. Streaming engines is now common practice in game development. That means 10GB levels are not out of the question next gen, making your average FPS or action game at least 100GB. Then you think about RPG's that could see 400GB.