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.