I doubt that a console based purely on digital distribution would ever work. I do however believe that by the end of it's lifetime the XBox 360 will at least dabble into it.
I do reckon in time we'll see full XBox 360 games being released on Marketplace to buy and download. Obviously those with Arcades / Premiums won't get anything / far at all but the Elite adoption rate will certainly go up and something like a digital service would definitely be justifiable.
Despite the shortcomings of the console's backwards compatibility, XBox Originals in it's form proves theres a market there to tap, we all know how well publishers are doing with the likes of Steam. It's inevitable this eventually works it's way even more into current consoles, and it seems like the 360 is technically speaking: the only console truly capable of allowing this to happen.
