You think that the Walmart, Costco, Groceries super store and Amazon are going to stop selling hardware. Hardware sales have been switching from mostly brick and mortar to online store like Walmart online, Costco online, Amazon, Ebay & Microsoft store. I personally bought 3 consoles from online store last year, Xbox one S and PS4 slim from Amazon and Xbox one X from Microsoft store.

There always going to be store or online store to sell Hardware because you're ignoring accessories which have a much greater margin compared to Hardware. Have you been to a best buy lately, their gaming section is now a small fraction of the total store space. 

Yes, if you take the games away, then stores won't want to sell hardware.  At least they won't sell it at current prices.  Most likely what you will get is hardware prices shooting way up, and then sales going way down.  Accessories alone aren't enough to sustain the current model without games.

Retailers don't get to assign MSRP that's on the manufacturers. Have you never been to a Costco in your life?, they only have hardware/accessories, gift cards with hardly any software. I won't even call what your saying a theory since it's simply flawed thinking. If there are any profit to be made online or brick and mortar retailers will sell it.  Every store are already shrinking and getting ready to rid of dedicated store space for games. You really think that Walmart and company got to decide how much the Xbox one X was going to cost? They told Sony that the PS4 must cost $399. 5-10% profit margin on a $500 consoles is $25-50 per units sold. 

I go to Costco regularly.  Their business model is different from every other retailer, so they are a bad example.  Also they do sell games too, but they don't have near the selection of anyone else.  

So, maybe a pure digital model can work if Costco is the only one selling hardware, but really they are just a small chunk of the game market.

Uh, no... Internet IS getting better (slowly) but premiums aren't getting cheaper. And don't mistake cheap prices for good internet because cheap internet ($30 - $40 monthly) gets you cheap speeds. (5 Mbps - 15 Mbps) 

I really don't know what you are talking about. Or how in good conscience anyone can say what you are saying.

1. Its actually pretty good we are even in a world where 5mb/s - 15Mb/s could be considered as "cheap speeds".
   
   
2. In my part f the world I pay $50+ for Tier 2 internet of 20Mb/s (Tier 1 is 6Mbs@$40 and goes all the way up to Tier 5 or so @ ridiculous). But at my part of the world everything costs more than it should. But t put things in perspective.... this time 2 years ago that $50 would have got me 6Mb/s.
   
   
3. I don't know how it is for you, but 20Mb/s means pretty fast downloads and buffer free 4k on youtube and netflix. As it stands the only reason I can think of to having internet even faster than what I have now is that I won't have to take abut 5 - 8hrs downloadingg some games. But thats not even  real issue as most games I get are preloaded or i just start the download before I go to sleep.
   
   
4. The internet is not immune to competition. Fact remains that we are getting a lot more internet for what we used t pay before. And that will keep getting better.
   
   
5. You say "slowly".......  I am sorry but how much faster do you need the improvements to be? And look at the gains made in internet speeds over the past 5yrs. and the 10yrs.... and thats slow growth to you?     

Digital Sales are still a growing minority of video game sales. I do anticipate a industry crash if Physical medium is eroded.....for very important reasons.

For one, nobody seems to recognize that the sheer existence of physical medium is how we know the games exist most often. If you are not the biggest of Publishing companies your game only gets visibility via meme word of mouth, or accidental discovery while going through life. One of Retailer's profit margins is Advert space. Space allocated for the encouragement of game sales. Without game consoles becoming more immediately profitable to sell, they become essentially pointless for any retailer to bother advertise selling. Think about it. The avg profit margin on a console is 0-5% usually. Imagine....Amazon, Bestbuy, Gamestop putting time and effort into selling product that makes them no money. At least TVs and Cellphones are largely pure profit when sold alone. And the occasional controller sale is not enough to offset that huge drop in profit.

There is also the issue that Digital Market spaces are the most competitive for consumer attention. I mean that in visibility. While App store markets have now booned into this huge money making system......very few of those apps succeed or get noticed. Some data released a while back showing that the vast majority of Steam output are financial failures, and that the only way of pushing visibility is Flash sales slashing your game's value to pieces. The money empire of Steam is almost entirely Valve side of the transaction. Majority of Apps can no longer be sold at any entry price as folks are accustomed to getting them for free, a symptom of the need to match and beat every competitor pricing just to get noticed by App Store limited ad space. So will this happen to full video games? If it does I don't think it sustainable. Console AAA Video games do not have the luxury of being super cheap to offset the potential to failure app stores have. Also eliminating the initial pricing of all games will pretty much kill any genre that isn't capable of garnering microtransactions, which would then be requried to recoup loss of Freemium releases. From my perspective, Games as a Service/Streaming has always been in preparation of this very outcome.

Pushing to eliminate physical medium entirely as a market initiative seems to spite itself for a small initial perceived profit boost. Yes, the elimination of the $7 out of $60 you would have given retailers is big, but the loss of visibility and exposure from those said retailers will tank its ability to sell without attractive pricing. Freemium Multiplayer games galore and kiss the singleplayer experience goodbye....

You've got good points.

When you mention App Store, that reminds me of Apple Store, even though a current gen iPad is more powerful than NSW, we don't see AAA games releasing there and one of the main reasons is the price tag. Apple Store is the most profitable compared to Android's (last time I checked) but still users are not likely to pay $60 for anything at all.

Even though there's some sort of advertisement on console stores, I can see what are you seeing about digital only games turning into digital apps where people won't see the value which could impact AAA games or make the industry go more and more into the fremium space.

However, since we're slowing migrating to the digital commerce, I also see many gamers that see value on digital games, many gamers pay full price on a digital game (they don't wait for price cuts) and I see many big developers encouraging digital purchases.

Regarding small and indie games, we also have to agree that before digital stores, most small games wouldn't be able to come out since they couldn't afford physical logistics. So, the competition among small games are huge, but they don't have anywhere else to go.

If game stores die out will it affect the number of consoles sold or will everyone just move elsewhere.

It's not like we have a choice. I mainly game on PC. I'd love to buy PC games on Blu-Ray, even if they're run through Steam, but I can't. All I can get is a handful releases on DVD.