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The first option is exactly what they wanted to avoid with the new system if they do that then there simply is no new system.

You are correct:

* Modular expansions!

This is the big one. In the past, we've released expansions that saw a loss of support for the base game, making for an "all or nothing" approach for the consumer, but supporting multiple executables just wasn't feasible for our small team and we needed to sell expansions to continue supporting the product. Hardly ideal for anyone who didn't want some of the features in an expansion. So, this is something we've thought a lot about in the last year, and have finally decided on a solution.

We've developed a new system to handle modular expansions so that you can buy the small packages that you want when they're released, and it will all be using the same executable, so whichever expansions you own your game will see continued support. There will be no problems with this in multiplayer, and if you have bought one expansion and your friend has bought another, you can still play together. You will have access to the features you bought and your friend the features he bought. Alternatively, if you'd prefer you'll be able to toggle any expansions "off" before the game starts.

But I'm not a Paradox employee, so I don't make the decisions, only offer my opinion. ^_^

(Usual disclaimer stuff, etc etc)
 
From a practical point of view, DLC is the new way of dealing with expansions. You are needlessly confusing yourself if you consider the two to be distinct entities.

In the era of boxed games, it made sense to only sell additional content to existing games in large chunks that you could charge a significant amount of money for, due to the significant costs involved with dealing with physical media, shelf space, and so on.

In the current era, the minimal costs involved from dealing with digital rather than physical media when adding additional content means that a developer can effectively add content in much, much, smaller chunks charging less money for it if he so desires and still make more money than he ever did on boxed game expansions - but he can also add content in large chunks at a higher price, if he believes that that's where the money is.

Thus the current question isn't whether somebody makes expansions or DLC - everybody makes DLC, some smaller, some larger, and some that would in earlier times have been sold as expansions - and those that think they can get away with it make standalone expansions in order to justify the higher price point to customers, who are still stuck in the old "an expansion is something rare and special" mindset. Or just to milk a captive audience. :D

Well, that's the era. Who knows what's next? :)
The main reason they should be considered different entities is that DLC do not build on each other. If the devs does a feature one way and then redoes it in a dlc then they have absolutely no way of modifying it.

I'm also curious how they'll do with mods and dlc. If mods will be required to use DLC's as dependencies if the mods and the dlc modify the same feature(s).

I have absolutely no problem if they'd want to make a dozen expansions but 50 DLC is going to be a nightmare. :(