A few observations from an FLGS owner:
* An FLGS won't survive unless it offers something above and beyond physical product. My store survived the Oct-Jan downturn in our area by growing its RPGA game days; we run games for 30+ people every Thursday and Sunday now.
* Legal distribution of PDFs: What I would love to do is print-on-demand services, but the problem with (90%) of these products is that they're not geographically concentrated enough to make the expense to set such a thing up a viable proposition. Consider that PoD desires are a fraction of demand for the PDFs themselves; then consider that PDF demand is not concentrated in any one area. My walk-in customers would have to buy a LOT of PDF product as PoD to justify the expense of, say, a color laser printer and binding materials...but:
* One of the things I have been harrying Wizards for (and I hope they'll do this, eventually) is to allow me to bundle PDFs of their books from my store with the hardcopies. Many if not most of my customers who purchase hardcover Wizards books from me have PDFs as well, and I'm sure that not all of them are obtained legally.
* The other thing that WOULD make PDF PoD services worth creating would be making it legal for me to print and sell Dragon magazines at my store.
* Yet another digital model Wizards could use is simple: let me sell cards that provide monthly digital subscriptions to D&D Insider. I've brought this up with them before too.
* Paizo, and other distributors, could make a profit by letting me sell cards with subscription services for their PDFs, and it would be really cheap for them to do so. The concept of a loss-leader might work for them here (though knowing how much it hurts me, I hesitate to reccommend it to them)...on the other hand, there are a lot of products available on small-scale via online methods (IPR for one) that could grow their business if I could sell customers a card that offered them a few PDFs. See also Baen Books; small publishers can't do free books as PDFs but they can do cheap ones to garner interest.
* Michael King is one side of an argument. Gareth-Michael Skarka is another. I'd like to believe most of us retailers fall somewhere in the middle of those extremes.
* Arguments about the lack of need for LGSes are often viewed from the point of view of individuals who post on online forums like this one: they're skewed from an observer bias perspective. Put another way, it's probably a no-brainer to presume that the percentage of people who never walked into an FLGS and don't think they are key to the growth of the hobby and started online is higher amongst folks who post on an online forum like ENWorld (or even Wizards) than it is in real life. Put a third way, if Wizards' estimates of its playerbase of 6 million, divided in half to 3 million(because they are probably exaggerating) are accurate, if all these folks posted on ENWorld and Wizards' boards the systems would crash under the volume rapidly.
Not that my own viewpoint is any less skewed as it comes from my perspective, but I can only offer the observation that large numbers (best guess, 75-80% of my TRPG customer base) of my customers (a) got their start at my store (or at the stores that previously occupied my physical location) after coming there for something else and seeing what we offered, and/or (b) knew/heard about/learned of the game elsewhere and are looking for a place to buy stuff that's not easily available online/doesn't provide the same feel online (like buying dice from pictures on a webpage, f'rinstance), and/or (c) owned the game or parts of the game but couldn't find other people to play with RL. For all the extolled virtues of online gaming (and all the hype about how 4E is WoW), most cross-pollination between the market segments I've seen is the reverse of what I see posted: D&D players who play MMOs rather than MMO players who suddenly have gotten into D&D. The success rate (in my store) of licensed properties (EQ the RPG; WoW the RPG) sucks.
* PDF Discounts: Michael King is flat-out wrong, largely because the Green Ronin publisher (her name escapes me) is right: the cost to produce of the book is so high that discounting it at the distributor end to the point that it matches (or even comes close) to the sales discount that can be afforded via PDFs would kill the publisher, to little net effect on sales volume. Those discounts are offered in the context of immediate market volatility in the wake of Wizards' announcements; any surge in sales garnered by such an action in PDFs is not translatable to physical sales. After all, you're capitalizing on the anger generated by a *PDF* issue.
* Pirating and Wizards: Look, never attribute to malice what can adequately be explained by incompetance. Even presuming that Wizards DOES NOT have a plan (and is in fact incompetant), their decision isn't malicious, it's just an unreasoned reaction to getting stung. I have heard from my Wizards rep that, shortly after the release of 4E, they actually started dedicating at least one employee (if not more) to the problem of tracking down distributors who break early-release dates. Recent actions involving online sales of Magic products also speaks to Wizards attempting to develop a coherent and useable policy with regards to these things. The lawsuits say the same thing. This PDF issue may well be a problem now--maybe an incompetant misstep, maybe part of a greater plan they have to "fix" the issue--but they're trying to do SOMETHING about the theft of their intellectual property. They sort of have to. This might not be the right move, it may not even be a step in the right direction, but they're trying. Piracy hurts them even worse than early releases do.
That's all I've got for now; hope this enlightens or spurs discussion or helps in any way.