Yep, but you don't have to download the game, which depending on your internet connection, it can take A LOT of time, heck it took me 15 hours to download The Witcher 2 (which was 13 GB iirc), and I have 3 MB of internet speed.

Well. Microsoft could also partner with Internet providers who have download caps in each respective countries and offer all the data over Xbox Live! As "Data Free".
A few internet providers here in Australia already do that such as iiNet/Westnet/Netspace and probably soon Internode. - Hence I can download as much as I want regardless of my download limit. :)
Same thing with Steam too, most of that data isn't counted due to avrious deals internet providers have done.

Essentially, if there is demand and it can be a big sale point, internet providers will follow, it's a chicken vs the egg game essentially, someone has to make the first move, but it can be a sale point for providers across the globe to bring in more customers.

I'd be wiped out instantly from the market. I'm 100km north of Sydney, our internet is $89 a month from Telstra and its a piece of crap. Its pretty common for us to have dial up speeds but we have had it up to 1.6mbps. Our only hope is the NBN 'said to run at a constant 100mbps' that's being rolled out across Australia but at the moment its have massive problems and I don't think it will ever be finished :(

Interesting, I did not know that, I'm with TPG on an unlimited plan (it will be interesting to see what kind of plans become available as the NBN gets rolled out more widely).  The difficulty is you would need to have similar plans in place in all countries that you hope to sell in.  The benefit to MS/Sony/Nintendo will only be fully realised when they don't have to print or ship a single physical copy of the game. As soon as you have one or two locations where you can't do digital, it means you have to put infrastructure and business in place to support physical game sales.

Still, the retailer thing is a pretty big hurdle to overcome.  You need people to be able to buy your system before any of the other stuff matters, it will require a significant change from the exisiting business model which may not occur until all three of the major players are keen to go down that road.

I always thought digital could work if there was like a little portable drive you could take to the store where they could upload the game. Would be pretty sick.

Having a presence at retailers is good marketing and encourages retailers to push your product.

Bluray technology is cheap now. It doesn't make sense to have another sku for a discless console. Nor would retailers want to push hardware that discourages buying games from a retailer.

Downloads could take days on slow internet connections and some providers have bandwidth caps.

Installing games in advance only makes sense when you pre-purchase a game. You are ignoring scenarios of people buying old discounted or used games. The disc just makes things easier for a lot of people.

The perceptions among gamers of an all-digital X1 might be better, but in reality it's not necessarily a better deal, at least as far as game licencing is concerned.

If the X1 were all-digital, you probably wouldn't be able to sell or give away your games at all. While there are some restrictions on this with the X1, it still provides more freedom to the consumer than a service like Steam, where you are stuck with the game you buy for all eternity. Hopefully we will see even more freedoms allowed as time goes by, namely more time allowed offline and the ability to rent and borrow games to some extent. Considering all the outrage being poured out against Microsoft right now, it's not at all out of the question that Microsoft will work on things like these in order to win back some goodwill from the gaming community.

And obviously, having discs allows retailers to sell used X1 games, which means they will still have just as much incentive as before to promote the X1, which means better sales for the X1 and its games. Just selling the console, accessories, and game codes would not be good enough for retailers when the competition is still letting them sell used games. Unless Microsoft was paying retailers to make up for the lost revenue, they would give the all-digital X1 the short end of the stick.

An Online only SKU would be great... Not every one of them.

I think the reason they ended with sort of a 'hybrid' system is because it would kill retail. I think they wouldn't be carried in some retailers, but even worse, more retailers would close.

If they just sold Xbox One at Microsoft Stores and Online I think they could do well. Then all games are just digital from them - that would work too. They could sell them much cheaper as they wouldn’t have to support so much rent, employees, shipping, and other cost. But I think they would lose out on the impulse buy, retail experience, etc.

It would eliminate gaming at retail for a significant percent of the market. Think about how much business is just impulse buy at a store.

There aren’t many bookstores left, at least not in the states. It’s nice at least for now to have video stores.

But overall, I think they might lose out that way if that did that in the end.

Another way to utilize retailers would be to utilize some sort of USB stick that could transfer the data more quickly, and have people bring their x1/ps4 USB stick into a store to load up some game on purchase.