Okay, this is the way it works......(You can see exactly what you are buying when you select a movie for purchase).
First, the $6.99 upgrade still applies to owner's of DVD that want to upgrade to HD (BR) quality.
The $1.99 upgrade offer is for those that already have the Blu-ray version of the movie on their Server. If you select "Your Library" from the first page menu (upper left side) in the Store, you will see an option to "Go Disc Free...". Selecting this will show you the movies in your system that can be upgraded to the Store's HD version for $1.99. In addition to receiving the UV copy, you will be able to download the HD copy. Downloading this HD copy will allow you to remove the BR disc of that movie from your Vault. You MUST download the HD copy in order to go "disc free" because the tags that allow playback without the disc present are embedded in that HD download version. You can then delete the BR version on your Server. This is the language you will see when purchasing the $1.99 Upgrade:
"Because you already own this movie on Blu-ray disc, you can upgrade it to go Disc-Free, eliminating the need to have the disc in a player or disc vault. The upgrade also includes UltraViolet rights for mobile playback, and can be downloaded to as many as 5 Kaleidescape systems."
In that "go disc free" section of your library you will also see $1.99 Upgrades for some DVD movies in your system, BUT, this is not for the HD version, it is to upgrade to the Ultraviolet copy. This applies to the DVD version only.
Don't bother asking if you can keep the BR version on the Server and remove the disc if you pay the $1.99, the answer is "No" you must download the HD copy in order to remove the physical disc from your Vault. IMPORTANT: Although you can remove the BR disc from the Vault, you must keep the BR physical disk in your possession, as you currently do with DVDs (unlike buying the full priced HD download).
Nothing has changed with hardware, you will still need an M-Class Player in order to playback HD content from the Server.
Jim