I specifically remember that their plan was essentially CD Keys. You'd buy a physical game and it would have a code inside, or the discs would have unique identifiers that force linked to your account, or whatever.

So yeah, essentially physical media with a digital license. If you were going to be able to resell your game it was going to have to go through microsoft, or maybe you could lend a friend your disc and that lets them buy their own license for a small discount to play it.