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I defiantly see digital distribution playing a major role in the next generation. There are just too many advantages to it, especially for the console vendors. The worlds not ready yet, nor will be in three years time, for a download only console, but I can definitely imagine a console coming out with no default optical drive, possibly a bluray add on.

Especially Microsoft, I can almost see them coming up with a service oriented approach. You pay a largish subscription fee and are given access to the entire games library. You have to keep paying or you lose access to your game library. It certainly won't be for everyone but it's the kind of business model that Microsoft loves.