My only concern with this is that it solidifies Blu-Ray as the de facto next-gen dvd standard. If there's a lot of PS3's out there, and no HD-DVD players, it's pretty clear what the market will decide about HD-DVD. If I were Toshiba, I would be begging MS to include HD-DVD at launch; fact is, though, the format's not ready, certainly no one is ready to manufacture millions of HDDVD-ROM drives and stamp tens of millions of HD-DVDs, and Microsoft isn't going to sit around waiting for anyone to do so.
That said, MS has said the Xbox will work as an upscaling DVD player which, for the time being, is infinitely more useful to me than an HD-DVD player (what with the no HD-DVDs on the market). I'm not convinced high-capacity media will get much market penetration, or make for a huge difference between next-generation consoles. The lower cost-to-produce of DVDs may in fact work in MS' favor.