The hardware video game rental business is already (almost) dead. I'd imagine we will soon see digital rentals much the same way we currently have digital film rentals.
So Microsoft makes a deal with broadband providers so that game downloads don't count towards your download limit in exchange for some % of the sale price going to the carrier.
The big games companies will then all make these contracts but include clauses that prevent them from making similar deals with smaller distributors.
At the moment, it seems the cost of bandwidth is sinking faster than new games are growing in size. And making the games yet bigger again is hitting some economic limits on the game maker's side. If you've got broadband, you've probably got enough bandwidth even without special deals. (And yes, I know that's not 100% true, which is why I said probably, but we've got at least another year and maybe two or three before this is even remotely a big deal for the XBox720, during which the bandwidth situation should continue to improve.)
Steam users are used to this. You buy a game and then wait a day while it downloads. No big deal. Steam even pre-loads some games before they're released so that you can play them immediately when they're available.
On average I'd guess that people only buy 3-4 big name games a year which are over 1-2 GB so they probably won't bust their download cap. Also lot of steam games are Indie games which are usually 300mb-1Gb. When I was younger and couldn't afford games I would rent one or two every week, if everything were to go digital that download cap would be reached in a week or two.