In this generation, you can already download a lot of games, on all the platforms:

Wii: Virtual Console, Wiiware
360: XBLA / Marketplace, full Xbox games which are multi-GB downloads (Xbox originals)
PS3: PSN-specific games, PSOne classics, and even some PS3 Blu-Ray disc games such as GT5P, Warhawk etc.

Downloadable content is clearly increasing in importance, but it is not yet ready to be the sole distribution method since many people don't want to or can't download big games from the Internet. However, I think there's a high possibility that in the next generation, downloadable content will be fully supported as well as retail.

There is a number of ways this could be done. It looks like a good idea to have two versions of each console: one with an optical media reader (Blu-Ray or whatever) and a small/medium flash memory for gamesaves and small downloads, and one with a big hard drive which only supports downloadable content. Both would be priced similarly, and accessories would be available to upgrade either console to support both optical and downloadable media (probably for under $100). All games would be downloadable, but perhaps not all games would exist in optical media form (which also happens today).

The advantages to the game industry would be immense. They would get to still support those who prefer to buy their games at retail, while partly getting rid of the retailer's profit margins, which can increase their profits and/or allow them to lower software prices (with an advantage to gamers as well). The used games market would become smaller, which means more revenue gets channeled to the core of the games business (publishers and developers) instead of secondary businesses like retailers which are decreasing in importance due to the move to downloadable content.

It seems likely to me that at least one of the players will do this for the next generation, and perhaps all of them. The next-gen won't likely be over until the latter part of the next decade, by that time downloadable games will be long overdue if they're not available. The interesting question is, will all of the consoles support this? It looks less certain but very possible as well, given the advantages that this strategy provides to the industry.

IMO it will probably be like it is now with many PS3/P titles. Games will be released both digitally and in stores on the same day, just like PC games are doing for years now. We might see a heavy-on-multiplayer focused game that had a massive development budget selling less then 500k at retailers, but almost a million dls...

It will be a good choice because of the extra price, solid media discs will still get the big $, DL games have a chance of taking ~1/3 of the entire revenue... and thats something developers wont miss out on ;)

i think both will be supported. Many games will be available for download but most games will sell retail. However i fuilly expect retail sales to slowly drop until they are almost non existant

I don't think that a fully downloadable system will come out until the retailers are given a hand in it. Also, memory needs to continue to get cheaper and smaller.
I think that they can create download stations at retail stores and then games could be put on a memory device.

Floor space is a big problem for Retail chains, it also is a problem for everyone in the game business. This may be a solution. Even big stores like Wally World have online counter-parts that allow you to download.

If memory is cheap and small- then your next system could contain a download device that would allow you to hold 2 or 3 games at a time. Take the game home and then dump it on to a harddrive. Or even still maybe they could just stock up on through away storage devices and put the games on them.

Anyway

@CHYUII: I think Steam contradicts your point that retailers need a hand in the downloadable system. In fact Steam works very much like the idea I presented (you can still find most/all Steam games at retail stores).

Digital Download is just another step in the way we access games. The same process happened with Music and recently Video. Before you had to get physical CD's for music. But MP3 players paved the way and barely anyone buys CDs anymore. They all download it from iTunes. Same with videos. Albeit less common, but there are a ever-increasing number of people who stream movies. I myself get all my movies via Video-On-Demand from my Provider. I don't keep a physical record of the movies.

Since Gaming has followed these two industries somewhat similarly. It's very easy to say that yes, Digital Download will be the future for gaming. We're seeing a tiny bit of it now with what your original post said, Virtual Console/WiiWare, Playstation Store, and Xbox Live Marketplace all allow you to purchase entire games, demos, arcade games digitally.

It won't be long until entire games will be digitally downloaded, much like what the movie and music industry does now. So yes, 8th generation we'll be downloading whole games.

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.

That's because Steam is, essentially, a retailer. Valve takes a cut of the revenue from all purchases.

OT: Well personally, I like physical collections. That way, if the hard disk malfunctions, I don't lose everything. I think your idea would be very expensive, and probably not worth it. They would have to get the bandwidth to allow (by next gen) 50 GB games to be downloaded in anything less than 10 hours. They need to upload the stuff onto there. When games are getting larger and larger, it doesn't make sense to have digital distribution for proper retail games. It's just not convenient.

The current console market conditions are:

$180 Xbox 360 selling for $200 (10% margins)

To sell a console which relied 100% on direct downloads.

~$150 Xbox 360 selling for $200 (33% margins)

Xbox 360 used as the example.

The retailers would probably demand higher margins on consoles which allowed direct downloads. (Remember you're cutting their margins)

I think CHYUII meant physical retail stores (and my reply was based on that), so let's not make the thread more confusing.

On your other point, I think such big games will be the exception rather than the norm due to development costs. BTW Steam has a great solution to that, you can download games before they're released, and when the release date arrives the game gets decrypted and unlocked.

But let's take a 50 GB game anyway... to download 50 GB in less than 10 hours you just need a 11 Mbps connection, which you'll be able to get even in the form of mobile broadband by the time the next generation arrives. Of course this is mostly for developed countries and most importantly places with good broadband, which is where a lot of gamers are anyway.

True, but I don't think that will be a big problem.