It would of course make sense for Nintendo to provide smaller sizes.
But I guess Nintendo also has a big incentive to make the publishers happy in this regard. Because after all, Nintendo is still in fierce competiton with Sony and Microsoft, and I am pretty sure they do not want to have a smaller presence in bricks and mortar stores compared to them. And I guess they also sell a lot of consoles in these stores, so they have a strong incentive to maintain the physical edition, from the perspective of brand visibility alone.
But I guess Nintendo also has a big incentive to make the publishers happy in this regard. Because after all, Nintendo is still in fierce competiton with Sony and Microsoft, and I am pretty sure they do not want to have a smaller presence in bricks and mortar stores compared to them. And I guess they also sell a lot of consoles in these stores, so they have a strong incentive to maintain the physical edition, from the perspective of brand visibility alone.