The problem is that it seriously screws up resale to allow it.
Your all bets are off in the first scenario means that you now can be buying discs that don't work under certain circumstances; this is a serious support issue, not just for consumers but also for retail. It requires that retail have all the infrastructure support that the previous model required, but none of the upside benefit of exclusivity or guarantees of service; license revocation always works, and simply at the retailer's end, these other systems have failure points that need to be worked around. Why would retail be okay with that?
And it makes rental services like GameFly break horribly. I rent a game, upconvert it, and then return it. Free game, and it'll break for the next person to use it.