Takashi Sensui, General Manager Xbox Japan, has suggested that Microsoft currently have no plans to incorporate the forthcoming HD-DVD drive internally within Xbox 360 units, but did suggest that this could be a possibility if consumers show enough demand. Obviously, Microsoft are in a position where they"ll wait and see how next-generation DVD pans out before making such a decision; who will win between HD-DVD and Blu-ray; whether such a feature warrants the exorbitant price that Sony are demanding for the PlayStation 3 and if gamers are really concerned about such a feature.
The interesting question, of course, is whether Microsoft will ever look to a next-generation DVD format as a future storage medium for games; something that has to be treated with delicately unless they want to fragment their existing audience.