The word of the negotiations come from Stan Glasgow, the president of Sony America. Sony has not confirmed the negotiations as of yet however.
Adding a Blu-ray drive to the 360 would make the console even more competitive with the PlayStation 3 but would give Sony's electronics division a needed revenue boost. Adding the drive would add production costs to the 360 and so a new premium model would be necessary. There is always the possibility of an external drive just like the HD DVD peripheral was.
Glasgow also added that he felt physical media would not be overtaken by digital downloads like analysts and media moguls have suggested.
“Downloading will build over time, but this will be over a Period of years,” he said.