1) Digital distribution, doesn't have to be online only. They could offer retail kiosks that allow purchase of titles via some kind of storage device like memory cards or hard drives or download off wireless hot spots or off Live.
Here's a few pitfalls with this:
- Anything based on digital distribution depends on a valid internet connection to ultimately authenticate it. Hence why I wasn't able to play Robotron a week or so ago when XBLive was down
Or, what happens if your internet connection goes down? People won't be too happy when they can't play their games due to drm failure.
- Forgoing optical media means a hdd or very large flash memory will need to be built into the console, artificially elevating the consoles cost somewhat. They can't depend on people having their own memory cards, the console will have to be able to play a game out of the box.
- If they ever want to tap into the casual market then they can't assume that the entire population has their console internet aware.
4) Create their own proprietary optical disc.
This is good and bad. Good because it will making pirating their games very difficult as Shifty alluded to earlier. Bad because it will be unable to play all those cool hd blu-ray movies that my neighbors are enjoying.
In the end Microsoft isn't interested in just being in the games space. They want to control your tv and all media thats delivered to it, preferably with recurring fees. This will force them into being flexible. They can't just turn their back on a tech that requires them paying royalties to Sony if the big picture demands that they support it. Look at the recent addition of Divx support. Three years ago if you told me MS and Sony would be supporting Divx on their consoles I'd have said you are insane. Well, Divx of all things now works. Looking 3 years ahead, does Microsoft want to be shut out of the optical hd movies market completely? I personally don't think so. Then again I was wrong about them supporting Divx so who knows!
I'm personally a big skeptic of digital distribution replacing optical media anytime soon. I don't know about y'all, but I like to trade movies with friends, resell them, play them in the car, etc, all things that are made much more difficult if not impossible in a digital distribution only world. Same with games. I like to sell my games when I'm bored with them, something which is impossible with downloaded content. Hence why I buy the bare minimum online.