People still buy CDs, but that doesn't mean iTunes and digital distribution isn't king.

People jumped to .mp3's when they had easy quick access and a simple tool to use them. (ty Apple)

People will jump to digital distribution for movies and games when these conditions are met.

1) fiber optic internet with speeds ~>100Mbps. (this way, like music, a movie/game can be downloaded in a very short time)
2) TV connected box that makes it very simple to store/use. (PCs don't fit this as they are typically not connected to a TV, the next game boxes, iTVs, and GoogleTVs will fit this as well)

Both of these items are coming true now. Google has started affordable freakishly fast fiber internet and others will follow and even try to beat them to primary markets. The new TV boxes are already here and in 2013 will take off in full force.

So yeah, like CDs... you'll still see DVD/Blurays and game discs. But like CDs, their purchases will dwindle dramatically as 1 and 2 above become standard.

Your premise is close but your context and final solution is wrong.

It will simply be standard TV connected "consoles" that replace dedicated games consoles and for the most part, a lot of PCs for people as well. However, they won't be "PCs" in our current understanding.

They'll be Android, iOS, and Windows boxes that then come with various application marketplaces and wireless gamepads, keyboards, tablets, phones, etc as control devices.

iTV and GoogleTV are just the inception of this idea. The next three major game consoles from MSonyNintendo will all demonstrate this exactly as they incorporate these ideas. Apple and Android boxes will join them (Android already has shown this) and what will happen is precisely what I've been saying this the start of this year.

3rd parties will standardize across a all of them. The only differentiation will be the OS being used (and its overall application ecosystem) and the first party games unique to that box.

This isn't a bunch of years off or after next gen. This is starting when Wii U launches in November. When Ouya launches next April. When Apple decided to massively upgrade its iTV next year as well with their newly patented controller. When MS fully launches Win8 on its neXtBox next year. When Sony unveils PS4. Its happening now, its inevitable. The new BIG players in gaming won't be MS/Sony/Nintendo. Its going to be Apple/Google/MS/Nintendo.

Next gen will about Smart OSs and Nintendo/Sony will be Android OEMs.

...

With the Nextgen of Consoles coming up soon we will start seeing this push to cloud gaming. We already see how Sony now owns Gaikai and i expect to see some kind of game rental service around that system on the PS4. I also fully expect ether MS to have their own Cloud gaming service planned for the Nextbox or for them to make a Deal to allow Onlive on their system.

Once 3rd Partys start seeing how well their games are selling on Cloud systems since now their games can be accessed on so many devices, and all they  need to do is develop a PC version of their game with no porting involved. They will stop seeing the point in developing for Consoles and instead will Develop For PC and steam their games to set top boxes and tablets and consoles and phones etc.

Consoles gaming as you know it will die, PC will become the Go to Device for gaming as everything will be released for PC and steamed to consoles and other devices. Even games that where once console Exclusive will be available on PC and other Devices as i think Sony and MS will step out of the Console battle and instead battle for control of the Cloud by trying to get games exclusive to their Cloud service etc. Kinda like we see now with netflix, LoveFilms etc.

This right here.

But may I ask why you didn't include Sony in the new BIG players?

Your premise is close but your context and final solution is wrong.

It will simply be standard TV connected "consoles" that replace dedicated games consoles and for the most part, a lot of PCs for people as well. However, they won't be "PCs" in our current understanding.

They'll be Android, iOS, and Windows boxes that then come with various application marketplaces and wireless gamepads, keyboards, tablets, phones, etc as control devices.

iTV and GoogleTV are just the inception of this idea. The next three major game consoles from MSonyNintendo will all demonstrate this exactly as they incorporate these ideas. Apple and Android boxes will join them (Android already has shown this) and what will happen is precisely what I've been saying this the start of this year.

3rd parties will standardize across a all of them. The only differentiation will be the OS being used (and its overall application ecosystem) and the first party games unique to that box.

This isn't a bunch of years off or after next gen. This is starting when Wii U launches in November. When Ouya launches next April. When Apple decided to massively upgrade its iTV next year as well with their newly patented controller. When MS fully launches Win8 on its neXtBox next year. When Sony unveils PS4. Its happening now, its inevitable. The new BIG players in gaming won't be MS/Sony/Nintendo. Its going to be Apple/Google/MS/Nintendo.

Next gen will about Smart OSs and Nintendo/Sony will be Android OEMs.

or iTunes and the like kill CDs, damage maybe but not kill

It's a long ways off.

In order to play premium AAA budget games, hardware is required....this will be true for the next 8 - 10 years, minimum.

Now, eventually we won't, but it's a long ways off, I'm afraid