DD only on a console would have its share of problems.
While I'm sure in 3-5 years, 1TB storage will be cheap and common to the point where swappable 1TB HDD cartridges or even chip based storage could be implemented at mass consumer prices, there's still the issue of bandwidth unless the assumption is that all next gen consoles will be broadband connected.
I have a hard time seeing something simple like a console absolutely requiring a broadband connection just to buy and play games, even several years into the future.
It would be a much harder sell for retailers, even with "DL code in a game box" forms of distribution. While I realize a lot of gamers like having a physical box to represent the games they purchase, an empty box is only slightly worse than PC game installation discs that serve no purpose once installed.
For the most part, DD only distribution works best with smaller games (PSN games, PSP games, etc.) for the time being and in many ways is actually better in terms of ease of distribution and cost control for lower budget, lower cost and lower sized games.
I don't think I'd really want game discs for $5, $10 or even $20 PSN sized games, but then I realize I've been a bit quicker than some to accept DD and media free gaming (still bullish on Steam).