Do you guys even realize how much "bandwidth" a semi-trailer full of BDs, travelling 60 mph down the highway has? A heck of a lot. Bandwidth is indeed an issue, and will be for a loooong time coming. I can take a single CD to work and have "transmitted" 600 MB 10 miles, in just 20 mins. 30 MB/min == 500 KB/sec. That's more than the limit of the best available downstream household DSL connection (the limit is usually about 3 Gb/sec, or about 360 MB/sec after you factor in IP overhead), even in high-tech areas (which represent a minority of consumers, not a majority), and that's over an uncontested route (meaning there's not too many other folks trying to download CDs).
Now fill my pickup truck with CDs (probably several thousand).
Now fill the truck with single-layer BDs (~40 CDs each). Or fill 40 pickup trucks with CDs -- how many CDs do you suppose that is?
Now how about I drive a semi-trailer truck, instead of a pickup.
Digital distribution more efficient than physical? Lol. Physical production and distribution is much more efficient, in terms fo cost, for large amounts of data like AAA-games and movies. Internet trunk bandwidth isn't increasing at some magical rate (its the "leaves" that have been growing dramatically in size in the past few years) -- it will *never* be large enough to support serious digital distribution, unless all the distribution download centers are localized... and, go figure, that costs money... a LOT of money. Digital distribution, en masse, is not only impossible from a centralized location, its financially impractical with a distributed system.
The $4/month Microsoft charges for Live probably barely covers their expenses. If they had to support full digital distribution of full-size games... it would cost a fortune, and its not going to get cheaper. This begs the question, who would pay more money to download something over a long period, even on a fast internet connection, when they can drive to town and purchase physical media for cheaper? Does MS have some trick up its sleeve that will convince their consumers to spend more money on an item that is less tangible, while, at the same time, convince their shareholders that less profit per unit sold is a good idea?
Small games, on the other hand, are a completely different story. Small is perfect for digital distribution. If the games industry starts making little < 1 GB games exclusively, digital distribution *might* be feasible, although it would still cost a bunch more than it does now.
Digital distribution of small, or few, titles works great as is. It cannot grow to overshadow physical media at this time, or any time in the foreseeable future.
...that being said, when the world runs out of oil, and runs out of clever ideas of how to generate power for transportation or factories, and runs out of raw materials (like... oil) to build discs from... digital distribution will be where its at... except of course that no one will be playing video games. You'll be farming instead.
