That's not really true any more. HDTVs can be had for cheap enough, Blu-ray players are as cheap as £70 or less now,
£70 to get slightly improved quality on some discs doesn't rate as cheap in my book. And that's still twice the price of an equivalently cheapo DVD player.
Picture quality really depends on the the original source and even the style of the production, cinematography, filters used etc. There is a noticeable difference but other than sharper, clearer, there's not much you can do to quantify it without seeing it for yourself then switching back to SD content and seeing the difference.
I see the difference, I have DVD and BD drives in my pc so i can literally play the same movie in two formats next to each other were I so inclined. But my gf who wears glasses says she can see no difference - I've heard similar from people with less-than-perfect vision. It's hardly a scientific conclusion, but I think it's fair to say that the jury is still out on whether it is that noticeable. And I would definitely say the difference is less significant than the difference caused by other factors determined, as you say, at the source. Take, say, Friends on DVD vs. LotR on DVD for extreme examples. And the difference there didn't cost me £70+!
I don't think Blu-Ray will take off to the same extent as DVD did for home purchase TV and movies because of Netflix/lovefilm and other ways of being able to watch but I don't see it being a failure.
I wouldn't be surprised if downloading becomes the standard before Blu-Ray has a chance to take over completely. The only real advantage to Blu-Ray as I see it compared to any other system they could have come up with to repalc eDVDs is that the players still play DVDs, so there isn't an issue with your current collection becoming obsolete as there was with VHS.