From a business standpoint it makes sense... Take Final Fantasy XI for PS2 for example. In order to run the game, you needed a hard drive. So they included the hard drive with the purchase of the game and charged somewhere around $100. The hard drive wasn't really good for much outside of FFXI. Many people didn't buy the game simply for this reason. Think about how many games they could have sold if the hard drive wasn't required.
So for X360, if MS started makes HD-DVD games, then they would be producing them for a very niche market, and potentially make no money at all. People didn't want to shell out ~100 for a game and a hard drive, what makes you think people will want to shell out ~200 + the price of games to play X360 games.
The fact of the matter is, major addons such as hard drives and disc drives scream afterthought.
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