Yep, and have you wondered why the PS3 slipped 6 months? The Blu-ray launch also slipped a few months before Sony slipped the PS3 launch.
In 2005, the day the XBox 360 launched (to a resounding *thud* in Japan, where I was at the time) I was in Japan, at a Toshiba plant, working through HD DVD issues. That's _the day it launched_. If MS had wanted a HD DVD drive in the XBox, it would have had to be complete at least 6 months before that. At that time, the spec was still evolving.
Even had MS been willing to take on the insanity that is launching with a product that itself has not yet launched, neither BD or HD DVD drives at the time could meet the performance requirements. MS planned a hard drive-less console, and so was not going to skimp of optical drive streaming rate. 6 years later, and you've got mandatory HDD installs on a lot of PS3 games, and, surprise, none on the XBox.
Don't think that a HD format was never contemplated, it was, but the requirements couldn't be met in ship time, units manufactured, or performance specs. It was probably a simple choice in the end.