First off, that thing has tons of functionality that can be stripped out of it for console use- it's not like there's any need for recordable blu-ray discs in consoles, in fact, quite the opposite. It's not like it needs VCD or CD support, although for Nintendo it might need the ability to read GODs. Honestly, if Nintendo goes with a smaller bluray disc the size of a GOD, they'd be set.
Go and compare the price of a DVD recorder and a regular DVD player for your computer and then think about it some more. If you go back 2 years ago, the cost of DVD recorders was ridiculously high, in the several thousand dollar range. In fact, at launch the cost was very similar to this unit for something with similar functionality in a home unit. Last I checked you could buy a home DVD recordable for around 500 bucks.
The drive itself can't really be much more expensive to manufacture than any other drive, honestly. The only thing different is the type of laser used, and a proprietary interface but that doesn't really change the cost either.
I think that it's not only feasible, but very possible.
Once again though, I'm hoping Nintendo goes with a smaller disc form factor to help decrease piracy even more because around 2007 or so recorders for this thing will be affordable enough that piracy could be a real problem for them, kind of like the PS2.
I think it's very likely next generation that Nintendo WILL, in fact, have the most powerful unit, simply because it's not going to include TiVo, web browsing, picture editing, and all the other garbage that will very likely be in competing systems. Essentially they'll be able to make a competitive unit that for the same cost will only have gaming hardware in it, and that in my estimation is a good thing. My computer already does all that stuff much more efficiently. Besides which, does anybody really think they'll need another DVD player by 2005? I sure hope not.