Microsoft had a good reason not to get into the middle of the HD war between Toshiba's HD-DVD and Sony's Blu-ray. This quote pretty much sums it all up:
"There is no question digital will overtake physical. It happened in music and it will happen to our industry."
Microsoft plans to keep Xbox Live Arcade and Xbox Live Marketplace and add Video Marketplace, a service that will offer TV shows and movie content to owners of Xbox 360 console.