Blu Ray will certainly do just fine in this generation but it would seem Microsoft are doing well enough with the movie downloads form Live that they don't feel the need to work on building a BR player, which is fair enough. It certainly isn't impossible that by the end of this console generation digital downloading will be better than it is now but I think even 18 months is optimisitc. Some of the issues:
- Storage: Can't be transferred or copied. 360 hard drives are ridiculously expensive even for 20GB. You're talking maybe a terabyte drive to ensure you can download lots of HD movies (assuming they actually use true, 20GB+ HD files) without having to space juggle, especially if it includes games as well.
- Download Speeds: In the UK few ISPs give you anywhere close to the promised speed and they throttle or even cut off your downloading if you download too much. ISPs have essentially cut prices so much they can't afford to provide proper service any more, and they certainly can't afford to upgrade the infrastructure. There's a limit to how far in advance people are going to start downloading a movie (or a game) in preparation for playing it, especially if it's going to bog down their connection until finished.
- DRM: Links into the storage issue. As long as there are limits on what you can play, how and where you can play it or how long you have to watch it a lot of people won't touch the service. There were several music download services last year that shut down and people were no longer able to play their songs. Pirated movies are still superior to download versions right now, a problem that the music industry is only just getting its head round.
I'd be very surprised if Microsoft aren't looking into the feasibility of a download-only console for next generation, or at least a console that has every game available for download as well as available in physical form.