Xbox Live Arcade is dying (though it may be a slow death) - essentially because the need for discs, as opposed to downloadable content is becoming less important, and game developers are already offering bigger games in the downloadable format.
Here's the relevant snippet (of a much more extensive piece on where Xbox is going):
Wolf walks through all of this and then we discuss when that line between a downloadable Xbox Live Arcade game and a downloadable retail boxed game is going to lose its meaning. Eventually the Xbox Live Arcade is going to go away, right?
"Personally, I'd say absolutely, yes," Wolf says. "I think digital distribution has to be like that. I don't think XBLA will be leaving soon. It is an incredible platform. We have XBLA fans, I don't think it's going to be announced anytime soon. One thing Microsoft has proven is that we continue to try and adapt and innovate in experiences."
On a related note, Wolf also hinted that Microsoft could bring free-to-play to Xbox Live Arcade if the scenario is right:
"I can't confirm we're going to bring free-to-play to Xbox Live Arcade, but we will if we have content that makes sense for that."
It seems inevitable that the disc format, not only for games, but for movies, books and music, will go away eventually. Downloads and streaming have already become hugely popular among consumers across all of these categories. The only question is: how long until the disc options just go away (at least outside of the niche collector group).
It does seem that consumers are not ready to give up on discs just yet. That's why Netflix still has a DVD option, even if they're more focused on streaming for the future.