No, the articulated issue was what kind of games would push the limits (some games are much more prone to push the limits than others) and at what costs (content creation). The general argument -- and might I add the one that has proven to be correct by a land slide -- is that between cost/genre considerations very few games pushed against the limit
I think actually very many games pushed against this limit, and there is plenty of evidence of it too for those who care to look (crap compression rates for video in many games, having different language versions for different countries, many games using up the available disc-space, etc.). A lot of games decided to hold themselves to this limit, not just because of content generation, but because not targetting the 360 was becoming too costly for developers even for some Japanese developers.
Rockstar very early on was one of the few multi-platform developers who dared to publicly talk about the matter and already indicated they knew that Microsoft was working on solutions to overcome the DVD size-limit.
and in most cases reasonable solutions where found (disk spanning, HDD installs, etc). And this is even allowing for how long this generation has gone (Holiday #7 right around the corner).
But these solutions came much earlier than just this Holiday. Forza 3 was my first game that had a two disc setup that if you didn't install the second one, you'd lose out on some of the game's content (and not small bits).
DVD space is now becoming a much more looming issue for multiplatform developers for a multitude of reasons. Which, not ironically, is one of the natural pressures indicating that new hardware is needed.
I reckon we will never agree on this subject. I think Sony was right in thinking BluRay is the right size for this generation, especially if you expect to make games for it for 10 years. I don't actually think that can so easily be disputed as you made it sound.
I also don't think Microsoft ever believed differently. The question they were forced to ask themselves was "So we've come to the conclusion that basically HD DVD is not an option for us if we want to meet our two crucial requirements of getting a head-start, and being affordable.
Can we get away with just having a DVD drive again?" Just like they had done with optional or attacheable HDD after suffering for the fixed cost of it last gen against the HDD-less PS2. The decisions may even have been linked (e.g. we need the HDD if we get a slower HD DVD drive).
They answered the question with "Yes", and they were right, more than Sony ever even imagined, and Microsoft gained significant market-share from Sony, and may now have a permanent first place in the U.S. (of course there were more reasons).