I'm not convinced that physical media will die, at least not anytime soon. Unless a lot of content is cut from games to reduce their size, a technological leap in bandwidth and storage space will be needed before games can be easily downloaded.
First off, they'd take forever to download. PS3 games are going to dual layer discs (50 gigs), which would take about two hours to download in Japan, where the average internet connection clocks in at 60mbps; it gets even worse in the US, where it would take nearly a day with the typical 5mbps connection. Plus, the server demands that a big launch game (such as Halo 3) would require would be astronomical; just imagine - a million plus copies downloaded in 24 hours (that's 50+ petabytes!).
Secondly, hard drives just aren't big enough; the largest 2.5" drive available today holds 1TB, which is less than 20 games. Of course, hard drive density will continue to increase (historically doubling roughly every two years), but game size has been keeping pace. I suppose they could use 3.5" drives and/or multiple drives or switch to SSDs, but then they'd be driving up the consoles cost and risking the all important 'coolness' factor.
My third point, which has nothing to do with game size, is that they'd miss out on all the suckers collectors buying multiple copies with special editions and what not.
