the risk of being physical

I've been chatting with a friend of mine about starting a new media company together, and we have run into the physical versus virtual quagmire. While it would be ridiculous to only sell physical products, and not approach sales fro an online standpoint, we have been debating whether we should, instead, skip the physical sales altogether.

Because the company is focusing on media sales, and traditional media sales have been plummeting for years now, it is a difficult investment to tackle. We would be looking at physical media manufacturing costs, mailing costs, etc. Whereas, if we stick with virtual sales, we don't worry about any of those costs.

The problem that I have with it is with establishment and reputation. Does the existing media market put too much trust in companies who manufacture physical products, over those that only tackle virtual sales? Or is the "old mindset" finally being thrown out, in response to a lack of interest in physical product? As my friend stated, we are living in an "immediate gratification" society, and the best way to profit from that is to go wit the flow.

I imagine that this is the same dilemma that record labels are facing today. Do we give up on producing physical albums altogether now that online sales have become the purchase of choice? Or can we still squeeze some dollars out of them while we're waiting for the rest of the American consumers to get their first iPod and upgrade to Vista?