Blu-Ray to the Xbox would be fine and all but shinmalothar is on the money about the performance aspect. Sony offsets this by allowing end users to upgrade their hard drive at will. With a 360 if they bring on blu-ray (unlikely) then we need that same open hard drive upgrade option for Xbox (more unlikely yet). HDDHACKR is a nice option but you're limited to 250GB of a specific brand.
But all this may be rather moot by the time of the next console. We may go an older direction in the next round. Flash is getting cheaper all the time and eclipses optical discs in random access performance and, with some reading easy over 30MB/sec over USB2 it's got the read performance. Plus depending up on the interface used (doesn't need to be USB necessarily) capacity and performance could be left to the game maker. There may (or may not) be some security benefits with that distribution model, too. One thing we've seen demonstrated is that the optical disc drive itself can be a serious vulnerability. This all started when some hacker, I forget who but it wasn't c4e, demonstrated this point with the Hitachi drive of the original Xbox with the thought being the Hitachi in the 360 was very similar. Look at where we're at now. Only a matter of time before c4e turns his eye to the PS3. Sony thought they had a problem with Mr. Hotz.