I do think that the BDA, and individual companies have responded to Toshiba price cuts, but not to the point where they are willing to subsidize players. Just that they have likely ramped up cost cutting measures and have cut profitability a bit more than they would have liked to at this early juncture in the 'game'.
Yet, it is CE and studio support, as it always has been, which will drive the format war. Those two items lead to greater product visibility through greater shelf space in stores and on retailers shelves. You get far greater consumer willingness to buy in when their favorite brands endorse a specific player.
I don't think this will kill HD DVD, but I don't know if HD DVD ever was 'alive' either. HD DVD and Blu-ray have both been fighting to gain just marginal market penetration, yet Blu-ray has managed to do a lot more at this point. Both formats are 'dead' but fighting for life, Blu-ray seems to be fighting a lot harder and it is actions like this move by Blockbuster that can help shift consumer perspective.
That is, it isn't one thing that will end this war, but a series of events, one after the other, which will let people know that one format is clearly a safer choice than the other. Articles will be written about this, it will be in newspapers, it will be online, on the radio. It will be followed up with reasons why BB has made this move. In the most recognizable, and most (or least) respected media outlets, this is just one more piece of news indicating Blu-ray as being the winner - or on the way to being the winner over HD DVD.
Of course, the actual competition is not HD DVD, but DVD.