The technology fetishists claim an anonymous "highly placed development source" has confirmed to them that the new disc format allows for an extra gigabyte of usable space on Xbox 360 discs. Current game discs use only around 6.8GB of a DVD's theoretical 7.95GB capacity, with the rest being filled up with gubbins such as anti-piracy measures. Digital Foundry speculates that Microsoft is either greatly reducing or outright removing the extra data.
Extra space will allow developers to include more (or higher-quality) textures, sounds, movies, and the like in Xbox 360 games.
As Microsoft's Xbox 360 successor is nowhere in sight and developers are still wringing more performance out of the current console, an extra 15% of storage space would become increasingly useful. It might also have a knock-on effect of improving some multi-platform PlayStation 3 games, as developers re-using assets across both platforms would have more space to play with.