The problem is not so much in digital downloads, but different price structures. There is a difference between downloading an album at perhaps a couple of hunderd megs and a game at a couple of dozen gigs. If you were to go down a digital and a physical release then any price difference should only be slight say no more than £5/€5/$5 etc.. Any more than that and you are in effect penalising people based on where they live. Not everyone has superfast broadband or even broadband some are still on dial-up.
How does Steam do it then? I've seen games that are on console for $60 sell as low as $10-$20 on Steam. If its all digital distribution and no brick and mortar operation to support, how can it not be cheaper? Console manufacturers get a royalty already so they should be set.
Steam does it because the PC is an open platform, whereas consoles are closed platforms. Valve and the publishers that sell through them aren't afraid to compete with the hight street shops in that particular market since it's still considered somewhat of a niche.
Also, since nobody has figured out a way to make console hardware downloadable (stupid laws of physics) they still depend on the shops to sell and advertise their platforms. Drastically undercutting them in game sales could mean they refuse to carry their products. ANY of them. So no games, no consoles, no peripherals, accessories or merchandise.
This didn't happen with PCs because most of the high street companies that sell PCs aren't primarily concerned with games. Mostly they're just interested in selling the hardware an related non-game related software.
This is why I'm interested to see where the 'Steam Box' concept might go. I mean imagine a console like platform that runs Windows (or windows converted to Unix) games? There wouldn't be just one manufacturer exercising a monopoly with proprietary formats, but several competing products. Backwards compatibility would be a huge selling point while the openness and adaptability of a fully upgradable system wouldn't limit or hinder game developers so much.
Don't get me wrong, if they ever get it off the ground it'll be an uphill battle to get anywhere near the install base of the Playstation or X-Box and there's no way in hell Nintendo will loosen their grip on their IPs and their own platforms anytime soon...but who knows. Once, long ago I might have said the same thing about Sega and look what happened to them.