There's a lot to like about digital downloads. Cheaper distribution models lead to the possibility of increased innovation or more bang for one's buck. The convenience of shopping from one's home without having to spend money, time or effort grooming before traveling to a public place filled with those annoying creatures known as people only to acquire the latest, greatest AAA gaming title. Digital downloads would reduce carbon emissions, greenhouse gases and consumption of electricity required to power the energy hungry displays found in gaming retailers. They may result in more timely delivery of product too, no cursing another country/region/state/suburb's store for breaking a release date, no waiting for a delivery man or woman to knock on the door at some ghastly hour with your game a day or two later than the "official" release date. Anything before midday is ghastly.
Digital downloads also have a couple of flaws.
Without a physical presence there is no motivation for a provider of the necessary telecommunication services to accommodate digital downloads unless they receive a slice of the profit pie. Existing digital download providers, as far as I understand it and my understanding is very limited, operate independently of the telco providers that enable connection to their service. This is fine, reasonable, understandable, but it only really works as a delivery mechanism in densely populated, wealthy, single nation countries that are not heavily restricted by legacy infrastructures. Basically Canada (the southern bits) and the US. Oh and Estonia which kindly legislated a free wireless broadband internet service for every one of its 1.5 million inhabitants. Time to move methinks.
Europe may well have internet connections and digital downloads available to it and it has a very high population density. It also suffers from having many nations with different ideas about how to implement and regulate telecommunications. Not to mention having an overly bureaucratic model steeped in ancient traditions that is not highly adaptive to change unless there is recompense. The EU is something of a counterbalance to this very problem yet one need only look at the different regulatory behaviours toward games, different buying habits and product distribution to know that this is a complex market.
Poorer nations such as most of Africa, India and South America will only have services of worth available to the very rich who can afford them. Most of their populations will not be able to access their games via a digital download medium for a few years yet as we're talking significant economic reform and fairly massive economic investment.
Isolated, low density nations such as Australia are already falling behind the technological capacity of the rest of the world. The cost to profit ratio of providing state of the art services isn't justifiable, with only the wealthy being able to access the premium services.
Physical shops get around by existing in the real world, by being tangible. They drive entire industries through encouraging shoppers to congregrate and spend their earnings. Gathering together in shopping centres shops compete with one another for the consumer dollar, kroner, pound, yen or yuan. Existing behaviour patterns tell us that people like to have a wide array of shops in centralised locations because their funds are limited and they must decide whether to eat or to buy the latest console title, whether to keep clean or cover their car seats with pure wool. Removing the possibility of buying games from physical stores without providing the infrastructure required for the most likely buyer (the working classes) may result in a large loss of market share.
I have an acquaintance with a dial-up modem and a PS3. They lament not being able to buy Blood Siren in a physical format. They're in credit stress at the moment, cannot justify the increase in service (and can barely justify their dial-up) and still spend more than they can afford each pay period. With the current economic climate surely this scenario is going to become more likely than less? Is it all a Sony and friends conspiracy to ensure that Blu-Ray remains relevant for the entire life cycle of the PS3? If consoles are on their way out as a means for delivery gaming, then will Telco's become the new console market as they enhance services to deliver the product to a larger market, seeking to recoup losses on standard services introduced by VoIP and introduce new internet fee structures for distributors of digital downloads.
It is said that possession is nine-tenths of the law. Interestingly enough this is pretty accurate. Software, however, is a little wonky when it comes to possession. Most software is a license that permits the user access to the software for a fee. If it comes in a disk based format the owner, "owns" the disks and may do what they like with them, but they don't entirely own what is on them. DRM and SecuROM take this concept further. You, the user, may have bought the disk that contains the game Spore, but there is only one user allowed per disk and should you upgrade your computer more than three times (according to the manual) you will need to renew your license. That is, buy the game again. General consumers aren't largely affected by these legalities because most software developers aren't too restrictive with their product and they don't upgrade their systems or crash their hard drives as much.
Digital downloads, however, are poised to change all of that. You see, without that disk the user only has a set of code on the hard-drive of their processing machine of choice. Strictly speaking that code doesn't represent a thing, it represents an idea with ownership of ideas differing slightly from ownership of objects. That said, I'm not a legal person of any kind so I may well be completely wrong! Yet, I believe that who owns what is still being explored by the law. Second Life has had its fair share of thefts with interesting implications try this post, or this post if you want to start exploring this quagmire of confusion, old news maybe, but more relevant to now with all the controversy surrounding Spore. Sure they can claim that you can re-download a game, but this only works if the distributor continues to offer it. You've bought it and you should be able to keep it, but if you have a hardware failure of some kind you're at the mercy of the distributer more than ever before.
Publishers don't like the trade-in or rental markets either and for good reason. Yet there are reasons these facets of the business should be allowed to continue. They stimulate interest. They allow a potential buyer to test a legitimate copy of a publisher's game without having to resort to bit torrents containing cracked pirated copies. They generate throughput and enable gamers to keep their favourite games while reducing the cost of newer games. I realise that this limits the total numbers of games sold as trade ins, they aren't counted as actual sales and they don't generate profit for publishers. However, as with the infrastructure problem above, the issue here is that distributors have no connection with publishers, the lucrative area of 2nd hand games is purely the domain of the retailer. Savvy publishers could perhaps find ways to enhance their overall profitability by connecting with this aspect of the business rather than trying to eliminate it. Some sort of buyback scheme with a cross-promotional tie in that links the business aspects of the physical distribution model might help curtail the highly variable income derived from a high risk product portfolio. Other options exist, of course, I won't bore you with a list of my ideas as my intent is to illustrate that generating interest in a market that is not yet saturated will increase overall sales.
Digital distribution offers a different set of opportunities, of course, but with existing profit areas already prime for milking why aren't more businesses looking for greater leverage?