DVD movies generally are 4-5 GBs in size when you actually view the VOB.s The rest of the DVD capacity is filled with junk, I mean, valuable extra bonus features and interactive content like quizzes and minigames that brings the movie experience to life.
The movie downloads are 6.8 Mbps VC-1 in 720p. The sound is 5.1 DD sound (640k I think). Some movies are only stereo (e.g. most Disney titles) but this is the studio's decision, not a technical limitation.
Keeping in mind that 720p has half the pixels as 1080p, that means you're getting image compression similar to 14 Mbps on Blu-ray, which is "good enough" that it's not really limiting the image quality.
(For comparison, Batman Begins is only 12 Mbps on average, and is one of the top rated HD DVDs (releasing shortly to Blu-ray).)
Slight technical correction. The sound is 5.1 WMA. The XBOX 360 re-encodes it to 640k DD unless you have one of the few receivers capable of receiving and decoding WMA over S/PDIF (mostly Pioneer models) which will allow you to select the option to send WMA audio as a bitstream.