"It's unfortunate that Microsoft's external HD-DVD drive will not enhance the experience at all for the gamer. Sony realizes that to truly take gaming into the next generation requires a larger data format for both games and movies. PS3 uses the Blu-ray format for gaming, giving developers 50 GB of high-definition storage on a single disc, while Microsoft's 9 GB DVD gaming format is an obstacle for storing HD content. Furthermore, Microsoft's announced HD games patch is really just a compatibility feature — upscaling lower-resolution content does not make it Full HD (1080p), something that PS3 can do out of the box."
Sony Responds to HD-DVD Announcement [Kotaku]