If you ever hear someone say "Blu-Ray isn't needed for this generation," rest assured they don't make games for a living. At Insomniac, we were filling up DVDs on the PS2, as were most of the developers in the industry. We compressed the level data, we compressed the mpeg movies, we compressed the audio, and it was still a struggle to get it to fit in 6 gigs. Now we've got 16 times as much system RAM, so the level data is 16 times bigger. And the average disc space of games only gets bigger over a console's lifespan. As games get bigger, more advanced and more complex, they necessarily take up more space. If developers were filling up DVDs last generation, there are clearly going to be some sacrifices made to fit current generation games in the same amount of space.
Granted, some really great Xbox 360 games have squeezed onto a DVD9. Gears of War is a beautiful game and shows off the highest resolution textures of anything yet released, partly because of the Unreal Engine's ability to stream textures. This means that you can have much higher resolution textures than you could normally fit in your 512 MB of RAM. It also means that you're going to chew up more disc space for each level. With streamed textures, streamed geometry and streamed audio, even with compression, you can quickly approach 1 GB of data per level. That inherently limits you to a maximum of about 7 levels, and that's without multiplayer levels or mpeg cutscenes.
Sometimes people ask us, "If Resistance takes 14 gigabytes, why doesn't it look better than Gears?" Well, for one, Resistance didn't support texture streaming, so we had to make choices about where we spent our high-res textures. Resistance also had 30 single-player chapters, six multiplayer maps, uncompressed audio streaming, and high-definition mpegs. That all added up to a lot of space on the disc. Starting with Ratchet and Clank Future: Tools of Destruction we are supporting texture streaming, which will make the worlds look even better, and will also consume even more space on disc.
There's no question that you can always cut more levels, compress the audio more, compress the textures more, down-res the mpeg movies, and eventually get any game to fit on a DVD. But you paid for a high-def experience, right? You want the highest resolution, best audio, most cinematic experience a developer can offer, right? That's why Blu-Ray is important for games, and why it will become more important each year of this hardware cycle.