In an interview with a UK news website, Stephen McGill, the guy in charge of Microsoft Xbox in the UK, said that Blu-ray is going to be passed by as a format and that actually sticking to DVD has been a smart decision that kept the price of the Xbox 360 quite competitive.
Speaking to Xbox360 Achievements, McGill said that digital downloads and digital streaming are the next big thing; he mentioned that Xbox already offers "full HD 1080p Blu-ray quality streaming instantly, no download, no delay".
In reality though, optical storage still has a long way to go before becoming obsolete because internet connection is not constant and can vary widely depending on a number of variables; and that's not even accounting for data allowances and traffic management.
The real reason why Microsoft doesn't want to embrace Blu-ray has to do with the fact that the technology is being used by the Sony Playstation 3 gaming console plus removing any physical media makes piracy more difficult.
Ultimately, it is more about digital rights management. A Blu-ray can be copied, shared, resold or given away for free; the same can't be said about digital files protected by a DRM system.