I saw a lot of people calling BluRay out as a gimmick. I would like to point out that it is not a gimmick, and it may actually be something that MS will be forced to adapt to. Layered DVD can hold up to 8.5 GB (single sided, multilayer), while a BD can hold over 30GB on just one layer (and plans to hit 100GB multilayer in the next few years). This presents a massive limitation to developers, as Square Enix has already demonstrated. The MP3 replaced CDs so quickly because it takes a few minutes to download a 5~10 MB song (most of them aren't even that big). The current internet infrastructure is not efficient enough to provide you with convenient downloads of 20+ GB. It'll take you almost a week of non-stop downloading to get the 20~25GB game that is FF13. Not only will you be annoyed, but your ISPs will be bitching about it too.
I think MS's problem might be more about economics and sociology than electronic engineering. If Sony follows the trend they've set, then we can expect to see the PS4 sometime around 2012~2013. If MS doesn't put out a replacement for the X360 at around the same time, they're going to be late joining the "Next-Gen" crowd. It won't really matter if the X360 is still technically capable. By that time it will be stale. It will be old. It will be uncool. It will be what the losers who are too poor to afford the new toys play. The amount of hype surrounding the X360 by then would be equivalent to the amount of hype around the PS2 in 2008. The X360 will thrive as it already has, but it will not allow MS to maintain a stranglehold over Sony.
The worst part is that MS might be caught in a difficult position in 2014~2016 (depending on when the replacement for X360 comes along), one that's similar to what the PS3 encountered in 2006 but worse. They're going to be looking at an industry that has had 2~4 years of playing around with the PS4, without a player base for their new console, and having to break in with a brand new, high priced console against a Sony console that people are already familiar with and is most likely already at the "Sweet Spot" of $300 a pop. On top of all that, the PS4 would already have a few years of game releases under its belt, with the 3rd party developers already getting the hang of developing for it. What that means is that the new MS console would essentially have PS4 ports. Combined with a terrible first party lineup (aside from Project 343, Rare and Lionhead, they have basically no first party devs), MS will be in a difficult position in terms of gaming library. A large portion of the PS3's current success (perhaps even more so for the Wii) can be attributed to the massive first party support that the console has. As a company that's almost completely dependent upon third party support, can MS really afford to fall behind Sony in the next generation?
EDIT: Just in case someone wants to try to pull this one on me. No, neither Halo nor Gears of War are first party (Halo will be soon). Bungie is NOT a subsidiary of MS, and neither is Epic Games. The only big first party X360 games that I can recall are Halo Wars and Fable.