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While the big buzz about the recent Xbox software update centered around social TV, avatar marketplaces and Netflix, it was another feature that was perhaps the biggest news of all: Games on Demand. With the recent update, Xbox Live customers can now purchase and download the full versions of current generation game titles directly to their console.

Why was the Games on Demand feature from Xbox such big news? Because while smaller casual games (and game demos of full titles) have been available for download through the Xbox Live Marketplace, the recent upgrade pushes the console world – or at least the Xbox 360 – fully into the world of digital game distribution.

Some – including yours truly – have long predicted full-game downloads, but now that they’re here, will consumers embrace them?

There’s no doubt they have in the portable game space, where digital distribution is fast becoming the norm. We have Apple to thank for that, since the iPhone has fuel-injected mobile gaming (which is, by extension, portable gaming) by making cheap and addictive games available through the app store. Sony, the maker of the PlayStation Portable (PSP), is so convinced the age of the game download has arrived that it’s done away with disc slot altogether in its latest version of the PSP (called the PSP Go).

But while portables are fast moving away from the disc, in console gaming it’s not quite as clear that the end of the game disc is almost here. The reasons for this are twofold.

First, while gamers may embrace casual game downloads through the console, their behavior is much different with recently released full titles.  This is not only because the packaging is part of the full-game appeal (including the art and instructions), but also because many gamers have become addicted to the abundance of cheap used game discs available at big gaming chains such as GameStop as well as through Blockbuster.

The other major reason is limitations on hardware. The Xbox 360, while having the most advanced software and community features of all the consoles, comes up short when it comes to storage. While a big hard drive is a necessity for game downloads, most Xbox 360 consoles in the field do not have enough storage for more than a few game downloads (since full downloads can require up to 5 GB of storage), and some — such as the Xbox 360 Arcade — don’t really have any storage at all.

Making things worse, Microsoft charges a lot of money for its proprietary hard drive add-ons. That’s very different from the Sony model, in which PS3 users can buy a hard drive and simply add it on through a USB port.

So, while Microsoft no doubt has made a big stride with the recent addition of full game downloads, the combination of consumer reticence and its own shortsightedness, will likely limit the chance of the big boom that its hoping for. Consumers can be convinced to change their view over necessity of the disc over time, but Microsoft will also need to adjust its thinking about the Xbox 360 hard drive business as a profit center before the digital game download market really takes off.

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