Update: Microsoft released this clarification through its PR firm:
Following a recent update to our system software, we have become aware of an issue that is preventing a very small number of Xbox 360 owners from playing retail game discs. This issue manifests itself as a unique “disc unreadable” or “disc unsupported” error on the screen and is unrelated to our recent public beta. We are also able to detect this issue over Xbox LIVE and are proactively reaching out to customers that may be impacted to replace their console. Any Xbox 360 owners receiving this error are encouraged to contact us at http://www.xbox.com/support/contact so we can verify if the console has been impacted.
This disc read error message is tied to a change in the disc reading algorithms in a recent software update and is not specific to older or newer versions of Xbox 360.
The original post:
Microsoft enrolled a slew of beta testers to try out its upcoming Xbox Live update, and one of them claims to have received a letter from the company notifying him that its software update was stopping some consoles from reading game discs in their new, higher-capacity format. The good news, at least for this customer, is that Microsoft has pledged to furnish him with a new Xbox 360 and a year’s subscription to Xbox Live.
Kotaku reports the issue could potentially affect “a good number” of Xbox 360 owners and that Microsoft, which is rolling out the update to all users starting tomorrow through May 30, has yet to publicly address the scope of the possible problem. Games using the new disc format have yet to be released.