Sony took a lot of heat for its botched release of the PlayStation 3, and many speculated that its stranglehold on the console gaming market was finally broken. However, now that Blu-ray has been named the winner of the next gen DVD battle, Microsoft is looking to its biggest competitor for help with its HD DVD-aligned Xbox 360.

Though Microsoft denies anything official, the Financial Times reported that the two companies are discussing the possibilities.

The newspaper said that there is also the possibility of an internal Blu-ray drive being incorporated into a new, more expensive “premium” 360 model, as it is already in the PlayStation 3. Thusly, Sony would earn royalties from sales of a rival console–a first for the game industry.

As you’d imagine, Sony’s pretty pumped:

For its part, Sony welcomes the possibility of a Blu-ray-equipped Xbox 360. “If Microsoft wants to release Gears of War 3 on a Blu-ray Disc, I think we can make that happen,” Sony Computer Entertainment America’s vice president of product marketing Scott A. Steinberg told GameSpot prior to today’s report.

In what will probably the beginning of the end of the HD DVD format, Wal-Mart, the world’s largest retailer and architects of the Deathstar, has joined Netflix and Best Buy in backing the Blu-ray high-definition DVD format. To be fair, poor HD DVD really never stood a chance. The format was backed by Toshiba, while Blu-ray has Sony — and it’s library of 4,000,000,000 films (estimated figure) — in its corner.

According to Wal-Mart’s resident blogger (I wonder what that pays) Susan Chronister:

“So … if you bought the HD player like me, I’d retire it to the bedroom, kid’s playroom, or give it to your parents to play their John Wayne standard def movies, and make space for a BD (Blu-ray disc) player for your awesome Hi Def experience.”

Ouch. Look at this way, if you always wanted an Xbox 360, which currently only supports HD DVD, now might be the time to get one cheap.