The Blu-ray standard was finalised in 2004. I don't know if this would have been a good idea, but given the size of many of the games, DVD wasn't an ideal choice. Quite a lot of high-profile games shipped on 2 discs (AC3, Borderlands GOTY, Dragon's Dogma, Skyrim Legendary Edition, Dead Space 2 and 3, Fallout 3 GOTY, FO New Vegas GOTY, Mass Effect 2 and 3, Witcher 2) and a bunch shipped with 3 discs or more (Blue Dragon, Elder Scrolls Oblivion GOTY, Final Fantasy XIII, LA Noire, Lost Odyssey, Rage, Star Ocean).
It obviously wasn't a deal breaker but it's the only technical aspect of 360 that felt like it hadn't moved forward from the previous generation.
I dunno , the only physical 360 game I had was sneak king that I got free from burger king. Most of us thought dvd and bluray for games were already dated. I am also glad I bought digital as I can still download all those games today without needing the disc .
Now for movies physical still leads the way but hopefully that changes soon