One of the biggest problems facing digital distribution at the moment is pricing. As there is no direct price competition, MS is controlling the prices of downloads.
It's a bit sad that you can see a game on offer in downloads that still costs more than buying it new on offer from a retailer, and a lot more than 2nd hand. On top of this, a boxed game has an ongoing value. I can trade it in - not for much, but something, give it to a friend, swap it, or even just take it somewhere else to let them try or similar. Can't do this with a download, further reducing the perceived value of the purchase.
Basically: I know digital distribution is cheaper for the publisher. You not only save money, I lose out as you can restrict my use of the software. Unless this is matched with a noticeable saving, I am going to resent this, and actively avoid the download. The only other benefit, the slight convenience of having it immediately without having to visit a retailer is not that strong.
I'd love to see a more open market, where retailers can price their products freely on Live downloads. This could lead to genuine price competition, and much better discounting of games that have been out for a while, rather than the rather derisory sales for a handful of titles weekly. If I see a 12 month old game going for 50% of the original price I might be more tempted than the current full RRP - often above what you could buy if for in a retailer on the first week of release!