$40 sounds bout right. I don't imagine it being too different from what handheld games cost now.
Digital distribution need not be a problem if they go with cloud gaming. I can see it happening a few years down the line; just like how when you buy something on the PS store, you can keep deleting and D/Ling it, why not just cut the hassle and have you run them off the cloud? Everything's going more networked now, and while onlive's not doing great I feel it's merely ahead of its time (though I hate the business model where you're essentially renting all your games, but that's another story).
Current playing: No More Heroes