Final Fantasy XIII brought a lot of discussion between PS3 and Xbox 360 fans, since the use of three DVDs on Microsoft's console forced Square Enix to implement an higher compression of the assets, resulting in lower resolution.
The rivalry between the two fanbases, of course, brought the confrontation to extremes, making it more a matter of pride than an actual technical comparison between the two media, often shifting the focus away from the pros and cons of the solutions implemented on the two consoles, and their actual impact on gaming.

The Blu-ray discs used by Sony's console have a capacity of 25 GB for single-layer discs and 50 GB for dual-layer discs (used more rarely). This is obviously a quite sizable advantage over the DVD-9 used by the 360. More disc space means more and higher resolution assets for the games, less compression and the ability to store even the biggest games on a single disc.

Something many don't know is that the original capacity of DVD-9 (8.54 GB) isn't even used fully by the 360. A sizable area of the disc's surface is in fact occupied by the copy protection system, leaving about 6.8 GB of usable space.
This makes the difference in capacity between the two media even more extreme.

But let's not write off the DVD just yet. There are more factors in play that pure capacity.Sony's console has a 2x Blu-Ray drive, able to stream 72 Mbit per second (equivalent to 9 Mb/s). This is actually a relatively slow reading speed, only partly compensated by the fact that the it's speed is Constant Linear Velocity (CLV), meaning that the reading speed is the same whether the information is being read on the inside or the outside of the disc.

On the other hand the 360 benefits from the maturity of the DVD standard, sporting a 12x DVD drive, that reaches 129.6 Mbit per second (equivalent to 16.2 Mb/s). Again, there's a little caveat, since the DVD spins with Constant Angular Velocity (CAV). This means that the DVD drive reads the data at a variable speed depending on how far this data is located from the outer rim of the disc. Only the data situated near the outer rim will be read at the maximum speed listed above, while the data recorded near the inner rim will be read at a speed that's approximately half of the maximum, that would be 64.8 Mbit per second (8.1 Mb/s).

Given that the most frequently accessed data can be purposely stored on the outside, though, it's easy to see that the the DVD-9 is considerably faster than the Blu-ray. It's slower than the rival only when reading the innermost area of the disc.

Obviously Sony had to work a solution for this problem, or their console would have found itself crippled by the slow speed of it's optical drive.

They actually came up with two:
The first solution is pairing the Blu-ray disc with a Hard Disk, and that's why no PS3 model was ever released without one. By installing part of the most frequently accessed data on the Hard Disk, that has a much faster streaming speed, the console can compensate for the lack of speed of the drive. This, of course, brings a disadvantage, those mandatory hard disk installations that many users bemoan. Especially paired with the small hard disk that some older model of the PS3 sport (20 GB), they can become a problem quite fast.
Luckily the PS3 supports any generic 2.5" Hard drives, making changing the disc with a bigger one a relatively cheap solution.

The second solution is to redundate the most frequently accessed data on the Blu-ray disc itself, allowing the drive to access it faster by minimizing transitions between the different areas of the disk. This solution removes the need of an HD installation, but of course lowers the capacity of the disk, while still maintaining a considerable capacity advantage over the DVD-9's 6.8 usable GB.

In the end we are left with 15-50 Gb of storage space for the PS3, with a potential mandatory HD install in tow, and 6.8 GB of storage space for the Xbox 360 per disc.

The difference in storage space between the two media is often negligible, especially with smaller games. Most shooters and action games (genres that are the Xbox 360's bread and butter) are relatively small and short, fitting snugly in the DVD-9 with no trouble at all, rewarding the cheaper and faster solution adopted by Microsoft.
On the other hand we're starting to see more and more games that fully utilize the storage space of the PS3, sporting less compressed music, larger textures, more complex models and generally spectacular graphics. Uncharted 2 (that utilizes 25 GB), God of War 3 (35 GB) and Final Fantasy XIII (PS3 version, using 37.6 GB) wooed pretty much everyone with an impressive graphical presentation never seen before on the rival console.

Obviously many argue that the difference isn't that extreme, and games on a single DVD still have very viable graphics, so in the end it all boils down on how high you set your personal bar and how important ultra-detailed graphics are for you.

Moving on to the issue described by the title, the main argument in favor of the DVD-9 is that developers can simply print their games on multiple discs, effectively removing the space limitation.
According to that argument, the only problem resulting from such a solution is forcing the user to swap discs once in a while during gameplay. If it was truly the only one, that would be a quite negligible issue (more or less as negligible, in my opinion, as the forced HD install in some PS3 games).

Unfortunately things aren't always quite so simple, as there are some less known but much more critical issues laying in ambush under a multiple disc solution.

First of all, when putting a game on multiple discs, a developer has to make sure that all the assets needed at all times will be on every single disc. This means that character data (textures and models), recurring sound files and basically everything that accompanies the player from the beginning to the end of the game, needs to be placed on each and every disk. This adds to the overall disk space needed by the game, making the 6.8 GB of available space per disk even more restrictive.
Obviously this means that each and every area that has to be revisited during different discs has to be redundated as well, unless the developer wants to force the player to swap the disks over and over when moving from an area to the other, like happened with Star Ocean 4 on 360. Swapping disks once or twice, as said before, is a negligible issue. Swapping them multiple times becomes increasingly more annoying.

The data related to an area tends to be very sizable, because it includes the geographical data, all the textures, all the characters, all the enemies, their effects, every relative sound files and so forth. That's definitely not small.

That's why developers are often forced to make longer games (JRPGs for instance, especially when the assets are very big in order to ensure a better graphical presentation) that have to be split between multiple discs almost completely linear, or at least many areas need to be closed off as the story progresses to the next disc.

This is where the true limits of the DVD-9 lie, as the format effectively limits developers in their ability to freely determine the story flow and continuity of their games, having to constantly work around lack of space and the borders between the discs, preventing the player from going back after moving on.

Ever wondered why the only non-linear area of Final Fantasy XIII is made to fit snugly into a single disk on the Xbox 360 and the rest of the game is 100% linear? Now you know.

Now you also know why large games that allow completely non-linear exploration and returning to each and every visited area like White Knight Chronicles are, at the moment, only possible on the PS3.

Obviously a developer can increase the number of discs further, in order to have more space to redundate more areas and assets, but this creates more fragmentation, and consequentially needs even more redundation, in a vicious circle that puts the software houses in a tight spot. A spot that becomes even tighter if you consider that Microsoft's policies contribute to make things worse, forcing third party developers to pay higher (some say prohibitive) royalties to put their games on more than three discs.
That's why basically no game goes over that limit, and that's what forced Square Enix to compress the data for Final Fantasy XIII so much that higher resolutions couldn't be supported.
The only instance of a game going over the three discs limit is Lost Odyssey, that being published directly by Microsoft didn't have the Royalties problem.

Is there a solution to this problem? Of course there is, and it's the same Sony used to solve the problem of the slower speed of their BD player.

That solution is the use of the Hard Disk. Now that Microsoft is releasing their 250 GB they could consider the option of allowing developers to implement mandatory installations for their games.

Developers would be able to install at least a sizable part of the data that previously had to be redundated on the Hard disk, nicely turning the space limitations of the DVD-9 into a non-issue.

While doable, this solution poses quite a few problems mostly related to PR and marketing. Microsoft kind of put themselves in a bottleneck when they released the entry-level Xbox 360 arcade promising that an Hard Disk would be never mandatory to play Xbox 360 games.
Taking that back would definitely give an hit to the public image of the company, and would reduce the value of the cheaper Xbox 360 arcade deal, making it less desirable to the customers, since it wouldn't be able to play every game on the market. In the most extreme case it would possibly force Microsoft to discontinue the model.

The millions of users that have an original 360 with only 20 GB (like me) would find themselves only in a slightly better position, as mandatory installations would quickly deplete the available hard disk space.

On top of that, the ever exaggerated price of the Xbox 360 proprietary hard disks would make upgrading a quite costly issue.

Basically Microsoft has two options: swallowing their previous word and getting out of the cul-de-sac they put themselves in with the lack of HD on their arcade SKUs, or living with the limitations of the DVD-9 for the rest of the generation.

Personally, I'd vouch for the first option. After all most of the games that would need increased disk space are hardcore games, and not many hardcore gamers would every buy an Xbox 360 without a Hard Disk. The users of the arcade SKUs probably aren't part of the target of such games. In my opinion the advantages would clearly outweigh the disadvantages, removing a limitation to Xbox 360 development that will probably become more and more evident in the future.

Obviously, I'm quite sure that many will disagree with such a notion, but after all the decision is not mine. We'll have to see what will happen in the months to come.

Another problem related to this issue is that the limitation don't affect only the users of Microsoft's console, but also PS3 users.
While exclusive PS3 gamers can and often will fully use the space available on the Blu-ray, very few third party multiplatform developers will ever bother to make a separate set of assets for the PS3 version of their games (understandably, it would raise production costs a lot), ending up with most of the space on Sony's discs left unused.

At least with Final Fantasy XIII Square Enix did make a version of the game with bigger assets to better use the potential space of the Blu-ray, but it's quite difficult to completely dismiss the nagging doubt that the game could have been very different (and much less linear) if the flow of the story didn't have to be adapted to the 360's multi-disk setup.

In the end, obviously, most of this boils down to personal preference.
People that aren't interested in long winded storylines and ultra high-definition God of War 3-like graphics and high-fidelity sound won't care, and will be definitely content with what the DVD-9 offers. Others would probably like to see this limit overcame, in order to give more creative freedom and room for expansion and evolution to their favourite developers.
In the end this kind of decisions will be taken by the powers that be, and a revelation might come any moment or never. Unfortunately we can only wait and see what E3 and the following events will bring.