The enthusiast market is not the biggest market, and in almost every sphere of consumer electronics it is a source of residual, not primary income.
My mom and dad have a high-end 42" plasma TV. We watched Pirates of the Caribbean on DVD. It was in the wrong aspect ratio; they had it in 4:3 stretched. Before I could grab the remote to fix it my mom stated, "Look how clear it is, that's how you know it's HD!"
I'm not going to bother to look up the surveys because I don't want to spend more than 10 minutes on this post. But I've seen plenty to suggest that at least 2/3 of the market can't tell if they're watching an HD broadcast. Many people assume if the TV is widescreen they are viewing an HD program, even if it's in the wrong aspect ratio and the picture is blurry as Microsoft's plan for Windows Mobile.
Combine "2/3 of the market can't tell the difference" with "9X% of people hold X% of the wealth" and I propose the marketplace is divided into the following groups:
- A handful of rich idiots that buy the most expensive product available.
- A handful of rich enthusiasts that hand-pick the best components.
- A handful of middle-class enthusiasts that buy the best value they can afford.
- A dearth of middle-class idiots that buy whatever has the biggest numbers in their price range.
- A dearth of low-income people who can't afford the new technology at all.
Those last two groups are probably 90% of the market, with more in the low-income bracket. They're watching DVDs on SDTVs they bought for $90 at Wal-Mart 15 years ago, and it looks good enough for them. The middle-class idiots are watching DVDs on 720p sets they bought 1-2 years ago after finally clearing enough credit to afford them. They're both happy with DVD, and neither of them are in a hurry to drop > $1000 on getting the full HD experience.
I'm not holding my breath for widespread market adoption of Bluray until the consumer electronics market starts dropping prices instead of adding features. 6 years ago I bought a 31" CRT for $250 because the equivalent LCD/plasma (taking AR into account) would have cost $800. After 6 years of manufacturing, I'd expect I ought to be able to buy that LCD/plasma for $300-400. No dice, the TVs I want are in the $700-800 range. Why? Because instead of reducing manufacturing costs, companies are adding features that don't matter. I don't *want* 3D, but I expect in the next couple of years they'll just quit selling TVs without it. So instead of maybe getting a $200 cheaper TV without 3D, I get to pay $200 for a feature I don't want.
In my opinion, the HD market is a bubble that's going to burst very soon. I sure hope so; the companies that survive will likely lower their prices.
I honestly and truly expect that people will be streaming Bluray-quality video over fiber approximately 3-5 years after Bluray has beaten DVD down to 25% of the marketshare. In other words: barring some kind of holographic full-room glasses-free 3D technology being invented, I doubt we'll see a successor to Bluray before a switch to complete digital distribution.
TL;DR:
Most people can't tell the difference between an upscaled DVD or Bluray. These people don't care about high quality upscalers. Would it make sense for Microsoft to spend an extra $XX million in order to sell $0.X million more worth of XBox hardware? I think not.