When the next gen of consoles does arrive, MS will be forced to go blu-ray... DVD will simply not suffice all that much longer; certainly not for an entire new console generation.
At the same time, digital distribution of games will not be feasible either for the vast majority of customers, not for many, many years. Even the largest laptop harddrive can't hold more than a handful of blu-ray titles, and most gamers don't have the kind of internet connection needed to download dozens of gigabytes in any kind of reasonable timespan.
Besides, we're seeing a gigantic backlash in several western countries right now where ISPs are crying crocodile tears over how much network capacity their customers are using, and rather than invest in their networks they implement throttling controls and putting monthly download caps in place. Just downloading one or two blu-ray discs would break these caps wide open, and result in huge "data overdraft" penalty fees for customers.
So there's no other choice for MS than to again go for a physical format, and blu-ray is the only remaining choice there... Oh, the irony!