There are only something like 25 millon players on Xboxlive . . .but over 50 million consoles have been sold worldwide.
Piracy is a problem but its not like half of their install base is doing it - if they try to prop their console up with diigital distribution then they are alienating a large portion of their potential buyers (Myself Included).
I like buying used games, sometimes routers break, HD space isn't unlimited and I'd rather piss glass than have to wait 30 minutes to download a game whereas I could have simply drove down to the mall and back in 20.
The tech isn't there yet and trying to destroy another industry that isn't dealing significant damage to your business model (You're posting record profits Microsoft) is capitalism at its most disgusting.