Just like Ray I really want to believe this but the realities make it all seem like smoke and mirrors. I read somewhere this is all just bullsh!t posturing and when both camps release their respective products, can blame one another for lack of interoperability.
Both products are WAY too far along to throw it away (and not necessarily start from scratch) but certainly go back to the drawing board. Significant changes will have to be made to make each tech work together. This means R&D, manufacturing, and testing before unleashing the finished product to the consumer. My lay opinion is that this will take anywhere from 1-2 years. With HD-DVD poised to debut later this year I doubt they would cancel that only to redesign it.
Disclaimer: In no way am I an expert, this is all just my humble opinion. I certainly hope I'm wrong but both camps have already come way too far to turn back now.
