They are competing products, like VHS and Beta. Near as I can tell, the demise of Beta didn't do VHS in (and Beta was the better product, too!)
Think of it this way - HD-DVD can hold @30 gigs (HD-VHS is about 50). An lightly compressed AVI capture of a Star Wars LD is about 30 gigs. This means a very lightly compressed end product for DVD video (or more special features). Imagine each 3-hour Lord of the Rings film, or Das Boot, on a single HD-DVD, or for you computer nuts, much more space for easy hard drive backups onto optical disks, versus tape or internet storage.
HD-DVD is DVD on steroids. Your talk of it becoming a niche product sounds very similar to what was once said about DVD. You may not see much use in it, but it's a bigger world out there. Hell, some people still buy their movies on VHS nowadays. Luddites, you gotta love 'em.
