In short, the “Web Reference” is a .net 2.0 compatible Web Service reference, the “Service Reference” is a .net 3.5 “WCF based Service Reference”.
> Add Web Reference is a wrapper over wsdl.exe and can be used to create proxies for .NET 1.1 or 2.0 clients. Of course this means when you are pointing to a WCF service you have to be pointing to an endpoint that uses basicHttpBinding;