I say yes.

One of the shortcomings of the Wii U is that it doesn't have DVD and Blu-ray playback. I'm not sure about CD playback, but who would care if it did? The disc drive on the Wii U really doesn't do much beyond play Wii U and Wii games (more on that in just a sec). But there's more to it than that, it ultimately adds to the manufacturing cost and means lost revenues because of costs of distribution for the games being sold (returns, cost of goods sold etc.).

I believe it's possible for Nintendo to offer a digital-only WiiU with a bundled game at $200 (or even less) that would fare far better in the marketplace  than the current WiiU SKUs. The advantages of digital-only would allow them to price the console and games more aggressively, while maintaining the same bottom line for each console and game sold.

Q: What would retailers think? Wouldn't they be mad they can no longer take a cut of the game sales because of digital distribution?

A: I don't think they'd really care. If they have a product that has more consistent inventory turns than the current Wii U and its slate of games, they'd actually be happier with a digital-only Wii U. You could always still sell download codes for the most popular Wii U games (Mario, Zelda) or package them in for games like Skylanders.

Q: Wouldn't that ultimately mean less shelf space made available for the Wii U? Isn't that bad?

A: It would likely mean less shelf space, but I think retailers could re-allocate some of that space to where it counts the most: offering a playable Wii U in store. It's far more meaningful for people to get hands on with a game like Mario Kart 8 then to have a copy of Splinter Cell Blacklist U staring the customer in the face.

Q: Wouldn't this possibly hurt third party sales? I mean if they don't see that the game is available, they won't buy it.

A: Few people buy Wii U third party games. That's a fact that isn't likely to change. For the few 3rd party sales made for the Wii U anyway, they'd also be better off with digital distribution as the primary sales channel because they too could earn higher revenues with digital only. If the retailer desires a physical retail presence (like say Ubisoft with Just Dance), they can retail download codes directly. But for now, 3rd parties and retailers look at physical WiiU games as liabilities -- inventory that won't sell unless a fire sale is started - that's not advantageous financially. However, since download codes aren't necessarily inventoried, it makes the financial statements look more favorable while providing the same choices to consumers.

Q: Wouldn't people miss the disc drive? The backwards compatibility? Owning a physical copy?

A: The only folks who'd care about backwards compatibility are those who don't own a Wii. The Wii's back catalog also arguably competes unfairly with new games coming into the system. For roughly a similar price, why would I buy Batman Arkham Origins on Wii U (a fairly average game) when I could pick up a used copy of Metroid Prime Trilogy for the Wii? Nintendo not only doesn't collect a royalty for a new game sale, but they in turn receive nothing for a resale of one of their popular games. A digital only console (as well as a bigger eShop selection that might include the Metroid Prime Trilogy) could solve that problem. If people want physical copies so badly, they can buy a WiiU with a disc drive and use it. And if they want to play a Wii game that wouldn't ever be availabe on eShop, they can buy a Wii.  That simple.

What are your thoughts?

That's way too digital for Nintendo. That's like asking them to make games that only have online multiplayer: it goes too far for Nintendo. After all, the N64 still had cartridges, right?

Not with the current Nintendo account system.

No cause lets be honest here... the wiiU comes with 32gb of space and majority of the price comes from the gamepad and not the disc drive... So there is 0 point to it and they won't be able to get it down to $200 cause of how much the gamepad costs them

The Wii U might be able to have DVD and CD playback through the Wii Menu if you have used homebrew on it. Haven't tested it yet though

By Moore's Law, they ought to be able to provide more storage for a lower/same cost in the future.

Digital or not, the next Wii U SKU will likely have more storage for the same or lower cost.

Since digital games would give them higher revenues per game sale, they could take a loss on the console.

Considering their network infrastructure and the fact that they would have to advertise even more then they are already are because their games wouldn't be in retail stores it would be a great cost to remove a blue-ray drive which would be pennies on the dollar.

I think Nintendo realizes (or should realize) it's not the 90s anymore. It's hard for them to change. However, they know they need to adapt to the changing habits, tastes, and preferences of today's consumer. For nearly all other devices, we're ok with digital only content. I think that trend is only going to progress in the years to come.

Think of it this way: today, many children's first gaming experience comes on mobile. Put them on a console and ask them to put in a disk -- that's seems strange to them. The sooner Nintendo can shift to a digital only model, the more likely they are to be able to engage a new generation of customers. As it is now, kids can buy games on their iPad with mommy and daddy's credit card. But for a console? The game is literally locked away at the store.

Hmm, I think you'll be pretty dissapointed about that. It's really not as bad as you think it is.. yet. Your situation will be the reality however, although not in the next few years. Whereas the cartridges for the N64 were too late, a digital-only Nintendo console would be too early. 

Moore's law dictates that storage becomes cheaper as time progresses.

You missed my primary point: Digital sales bring in more revenue because there are significantly lower distribution costs. Because of that, you can price the console itself more aggressively, even at loss. You bear a loss on the hardware, but make far greater gains in software sales.

Retailer have to sell the experience. The current WiiU offering doesn't do that well. Digital only allows them to do that more effectively with less space -- if the priority is placed on putting a playable WiiU in the store rather than a shelf of games that no one is buying right now.

Re-read the QA portion of the OP and think about it.