It's not flawed because each developer and publisher is certainly privy to its own games' sales data, so they are well aware of the digital distribution sales of their own games.
They may be privy to their own sales data but they don't have the same knowledge of other companies' numbers. They rely on the NPD for this and the NPD has misleading statistics.
As for consoles having digital distribution... huh? I know the Wii Virtual Console lets you download old games that you can't find in retail anymore. Does Live! or PSN let you download new games?