Blu ray is a storage medium BUT don't forget it has a 36 Mbit/s data transfer rate. DVD is only 10.5 Mbit/s
That means you can stream a lot more data off the disc and hence gives the opportunity of better graphics.
Obviously this doesn't make much difference for the two HD consoles because PS3 has a 2x read blu ray drive (72 Mbit/s) whereas 360 is 12x DVD (126.60 Mbit/s)
Then you have to factor in that blu ray is constant speed whereas DVD reads slower the further from the centre you get.
Blu ray reading at a constant speed is actually really useful for reading textures and you don't have to put all the common assets near the centre of the disc for the fastest speeds.
So to cut a long story short.
1x blu ray data transfer is better than 1x DVD data transfer and therefore would be capable of better graphics.
Blu ray > DVD.
BUT because the 360 has a 12x read then data close to the centre it reads much faster than the 2x read speed of the PS3. But don't forget because of constant read speeds blu ray is excellent for procedural textures which are much smaller than compressed textures and frees up bandwidth for other assets - see Killzone 2.
@barom the reason the graphics will be worse in the 360 version of rage are because ID are running out of space on the DVD, not because it can't handle them. If rage were a smaller game or if it shipped with more disks then I'm sure John Carmack could get the games looking the same.
But then you have Guerilla doing some really clever things ie. using the constant read speed of blu ray to send procedural textures to the cell on the fly which frees up bandwidth and allows devs to put more assets put into lighting and other effects. So in the end the PS3 has the better graphics.
But that isn't because of blu rays capacity, it's because of the constant read speed coupled to the power of the cell. It's a really clever work around for the slower transfer rate, when you think about it. The 360 has a higher bandwidth, but is using it up with textures, then you have the PS3 with a slightly lower bandwidth off the disc, but it can use it much more economically.
In conclusion:
Blu ray helps produce better graphics, but not for the reason that all of you are arguing. i.e. capacity.
It's because of the constant read speed which feeds the cell texture procedures at a constant rate, this frees up the bandwidth for other assets. i.e. lighting, AI. In the end, that is how blu ray allows for better graphics in the PS3.
It is a combination of blu ray and the way the cell handles the data.
Look how small the Killzone 2 beta is. That is proof of what I'm saying. It's a quarter of the size of the Bioshock demo.
Bioshock is bloated with textures. Killzone is full of tiny procedures. Bioshock needs an install to be able to stream the textures fast enough. Killzone 2 renders the textures on the fly. 360 isn't capable of doing this because it only has a variable speed DVD. HDD isn't standard - so can't use that, and it doesn't have blu ray either. And then it doesn't have the power of cell for rending textures on the fly.
Blu ray improves graphics, but not by itself. It's only one element of the overall solution. Blu ray helps the process of improving graphics.
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