Developers don't get all the profit. MS and Sony would take a 30% cut from any games sold digitally, just like they do for XBLA and PSN games. Also, digital distribution doesn't make publishers disappear. AAA games still require big budgets and only publishers can fund those kind of games. Digital distribution is most beneficial to smaller devs who don't need huge budgets to make their games, as they can bypass publishers and only pay a cut to the distributors.
While I love digital distribution on PC, there's a big difference between that and digital distribution on consoles. The PC is an open platform so there are lots of competitors in the digital distribution space. This results in lower prices and more sales. On consoles, there is no competition. If you want to buy a game digitally for your Xbox, you have to go through Microsoft. If you want to buy a game digitally for your Playstation, you have to go through Sony. Without any competition on their respective platforms, neither company has any incentive to offer customers good deals. The fact that MS forces you to pay for basic multiplayer functionality is a testament to this. Sony is a little better in this regard, as they don't strip standard functionality from PSN in order to force you to to pay for PSPlus. Instead, they offer free games, though these are tied to your account and no longer accessible if you cancel your subscription.
I'm sure console-makers will eventually go all digital but don't expect it to be beneficial to consumers.