I think the question of the codec for red-laser HD-DVD is orthagonal to Blu-Ray.
The reason you want to go with red-laser HD-DVD using WM9 codecs is cost -- you don't need to retool the drives or the manufacturing plants.
You have cheap, easy to manufacture media. You have cheap, easy to manufacture drives. And since the DVD chipset vendors are in the process of embedding WM9 codec support into their chipsets, the additional chipset cost to build a red-laser HD-DVD player is only marginally higher than a regular DVD player.
Thus the attraction of HD-DVD(red laser) + WM9 for content providers -- it nets them HD quality video, but they get to keep all their existing manufacturing infrastructure. The only difference in the players would be a beefier processor and some new firmware. (Incidentally, who here thinks that with the right optimization, an xbox could play a 720p red-laser HD-DVD encoded with WM9?
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I expect a red-laser/WM9 HD-DVD standard (if one were to be created) to be a success because of these factors.
That's not to say that a blue laser format is ruled out by going with WM9 -- it's not an either/or scenario. The codec choice should be orthagonal to the physical delivery medium, especially regarding games and not movies.
As for xbox2 using a red-laser only drive... we'll see.