Extremely well written, simple and insightful piece. I see digital sales account for 50-60% of revenue for most SW game publishers at year 2 of next gen (as of launch of the last console). The consequences of this are:

1) Retailers and publishers are more distanced (as mentioned in the article)
2) Publishers make more money (due to higher margin and elimination of the middle-man)
3) The games industry booms (it's more convenient to buy games from home than to go to the store).
4) Game retailers like ebgames or gamestop will likely go out of business unless they change business formulas.
5) More platforms will directly compete with each others irrespective of HW limitations. Android vs iOS vs Nintendo vs Playstation vs Xbox will all be mostly one and the same.

The trend is there, I believe it will hit many by surprise how fast it will actually happen. It's already begun, and come this summer with NSMB2, it will be a revolution in the console industry for sure.

Well digital works for both the publisher and consumer. You can sell it at a lower price AND still make more money than retail. Why do you think nintendo is all the sudden extremely on board with digital? its the future

It would be interesting to see the split between digital game sales and DLC and online pass sales.
I would imagine that the retail revenue that the publisher gets is just a small share of $60 while the profit share on DLC is far greater.

Anyway there are 2 ways to speed things up. Either undercut the price of physical copies by a good margin or find a way to kill the 2nd hand market. It better be the first one.

Do you think a virtual mechanism for selling pre-purchased digital games would help push digital media? I'm not saying it's something that publishers would be ready to do, but in order to offer a better service some could consider it.

About online pass sales, do you mean like buying virtual credits, or did you mean in-game buying (like buying items with real money)?

I meant how much of the digital sales revenue is from actual full game sales. I suspect most of it comes from dlc and now the online passes for 2nd hand games.

I'm not sure what you mean with a virtual mechanism for selling pre-purchased digital games. The pre-purchase pre-download system on Steam seems to work alright. I still won't use it for full games, I rather buy a box if it's the same price anyway. It would have to be at least $10 less before I would get a digital only version.

For console games it would have to be even lower. $40 is the absolute maximum I'm willing to pay for a digital download of a full game. When I buy a console game full price from a store I can trade it in for half in the first month to buy the next game. There's a lot more games I'm willing to give a try for $30 instead of $60. So for now downloading full games is not enticing at all.

What are online passes for 2nd hand games, I never heard of these. When I mentioned a virtual mechanism for selling pre-purchased digital games, I meant a way to sell games that you already bought in the past, off a digital system, and by sell I meant digitally, online, 2nd hand. It's an out of world idea, but it could be nice.

qtn on your initial post. Do you think the profit to cost ratio for digital games is lower than that of DLC?

Never heard of online pass / project 10 dollar? http://www.eurogamer.net/articles/eas-project-ten-dollar-explained.
A lot of games on ps3 and 360 come with a code nowadays to activate online multiplayer or get extra content. The code only works once, you can buy a new one for $10 on the psn store and xbox live marketplace.

Being able to sell your digital license for a game to someone else would be great. But I don't think publishers are interested in such a system. They'll be happy to get rid of the 2nd hand market. On steam you can gift digital games and trade gifts with someone else. However once you have activated a game you can't trade it anymore.

On my initial post, I don't think the profit to cost ratio for digital games is lower, I merely suspect that most of the digital income comes from DLC and project 10 dollar. I can't imagine many people paying full price for a console game digital download. But maybe I'm wrong, full price games seem to sell well enough on steam.

I don't know if anyone really questions digital distribution as a future, if not the future, of gaming.

Looking ahead, I wonder what the future will look like if/when the industry is dominated by large content distribution platforms like Steam, D2D, Origin, XBLA, etc.

Activision's revenue from digital I can understand because of how big WoW is, but EA I don't understand. KOTOR online is not that big.

EA offer a lot of DLC in their annual sports games like Tiger Woods/FIFA, and they publish Rock Band, which obviously has a hell of a lot of DLC.