"The money from retail sales covers the cost of duplicating retail CDs (which is minimal anyway)."
Um, no it probably doesn't; if it did, everyone would do it this way. Retail takes most of the $4.95 or whatever they charge, and they hate low margin items like that. It's probably over a buck for the entire package, they have to pay the retailer to take it, they have to print more than they'll end up selling... it's a dumb way to distribute demos, maybe, but get used to it, guys.
"Bandwith isn't really an issue either; often games companies use 3rd party sites such as Blues, 3d Gamer etc to host demos instead of using their own bandwith."
Ask Blue if bandwidth isn't an issue. EA eventually won't have to ask Blue to remove demos like this (and I've said all along they probably won't ask them to pull it); Blue won't exist if he continues to host demos, because it's unlikely he, or anyone else, can break even hosting demos, which is why others are charging for it.
Imagine that, people charging you to download demos. That's so much more awful than charging for a CD... is everyone this up in arms about FilePlanet and Gamespot? Are you stealing passwords from them to download demos for free?
In a perfect world, the game companies would host their own demos as they are really just ads for their games. They've gotten used to others paying for their bandwidth, like Blue's, so don't expect them to pony up the cash. I'm betting they'll drop demos altogether before they host their own demos.