What Microsoft should do for next-gen DRM
Here's what I would do if I was running Microsoft:
1. Disc based games work just like disc based games have always worked. You can use them, borrow them, trade them, sell them, rent them. You can't play the games without having the disc in however.
2. Digital games work the way Microsoft proposed they work. To play them, you have to go online once every 24 hours. (Maybe 48 isn't unreasonable to publishers either). However, you obviously don't have to change discs, you can allow one friend out of you 10-friend "family" to check a game out of your library and play it when you're not. You can also access your library from any console you sign in to.
3. If you like the sound of the features enabled by digital games, but you don't have the bandwidth (because of speed or caps) to download 50+ GB files, you can convert a disc-based game to a digital game. Once you do this, there's no going back. The game disc becomes a useless piece of plastic.
There are two ways of achieving part 3. The first way is that you could return the disc sometime after installing it to a participating retailer, who you give your gamertag to and they activate the digital license on your account and destroy the disc, or whatever Microsoft wants them to do with it.
The other (and in my opinion better) way of doing it would be a unique key embedded in each disc. When you choose to "digitize your license", the key on your disc would automatically become invalid. For this to work, the console would require a one-time online check each time a game disc was inserted that it had never encountered before (or maybe hadn't encountered in X days). This online check would make sure that nobody had previously converted this disc to digital, rendering the disc useless.
I feel like these ideas would keep Microsoft from pissing off either one group or the other.