How Microsoft will be getting this extra space has to do with the company changing the way that the actual disc is structured, which will increase the amount of game data available by about 1GB. Most of this gain will come from doing away with the DVD-Video partition on the disc. Besides being used for DVD-Video, this partition was also used for anti-piracy protection, which means that besides the additional space, it is also likely to feature a re-worked or new anti-piracy scheme.
Some sources are indicating that the video partition was located near the center of the disc which, of course, has slower access times. This means that developers who take advantage of the additional space of the new format will also have to adjust for longer load times for data located closer to the center of the disc. These access times should still be within acceptable limits, however, and the developers who need the extra space will not be worried about the slightly longer access times.
It seems to us that this could be what Microsoft is actually planning; if so, it should be helpful to some developers who need the extra space, but we don’t expect anything very revolutionary to come out of the additional disc space if it is only 1GB in total.
Digital Foundry has some good information on what to expect and more the specifics here.