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He probably means a virtual system - no discs, not even user created ones. That's how XBLA works now with games - you store them on your hard drive (or memory card for the less fortunate), but are free to delete them at anytime, as they're available for re-download from the server (a record of your purchase is tied to your XBLA user ID). This also applies if you get a new 360 system and don't have a means to transfer one hard drive to another - you would re-download the stuff you already purchased.
And yes, right now (and for some time already) you can download hi-def movies (and other) at the same approximate quality as HD-DVD/Blu-Ray/Cable/Satellite now. Most downloads though cap out at 1080i, while the disc formats tend to cap out at 1080p. It would be trivial though to update that as demand dictated.
What I've noticed though with my HD-DVD and Blu-Ray movies that I have now, there are even more extra features than a typical DVD had, which is something that the downloads expressly don't offer. Discs still have their place, but you're right, I'm like you in that I have a large DVD library, but rarely watch any of the movies or special content more than once (and sometimes not even that - we have a backlog)! Ownership is nice, but I'm not totally opposed to virtual ownership - it definitely takes up less shelf space!
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Bill Loguidice, Managing Director | Armchair Arcade, Inc.
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