It shouldn't be a surprise to anyone that the Mac App Store is likely to be the preferred method for installing and updating OS X 10.7 Lion. AppleInsider reports that the next version of Mac OS X is going to ship digitally via the MAS, with optical media available as a backup for users on slow connections.
This approach solves the thorny issue faced by MacBook Air owners of upgrading the OS, and also keeps with Apple's theme of moving away from physical media as its primary means of distribution and eventually eliminating optical drives on most of its machines.
Will this mean that Lion will forsake disc-based distribution completely? Not entirely. There are still plenty of people willing to hand Apple money for a disc-based OS upgrade, and the company wouldn't turn this revenue source down.
AI's source tells them that a disc will be available for those without broadband or who don't want to use the Mac App Store. I fully expect Apple also to offer USB drives with Lion on them for sale, just like the ones included with MacBook Airs with Snow Leopard on them. I'm surprised that they're not selling them now for Snow Leopard, actually.
What Apple will most likely do is charge a premium for buying physical media -- akin to what happens now with Aperture. Aperture through the Apple retail site is $199, but it's $79.99 on the Mac App Store. The price difference will probably be big enough that it will nudge a good many users toward buying Lion via the Mac App Store. I expect that by Mac OS X 10.8 in a couple of years, disc distribution of Mac OSes will disappear completely.