I'm going to kick this post off by referencing a recently published article over at Seeking Alpha. It's entitled "4 Reasons for Microsoft's Xbox to Go as Big as Possible, ASAP".
The essence of the article is that the sizes of the 360's hard drive (particularly the Premium's 20GB drive) is no longer adequate for the current climate. Specifically, it speaks of a climate that Microsoft themselves are beginning to create, where the world of digital distribution will be the future. Indeed, one only needs to listen to the stirring words of Mr. Ross Erickson in the most recent Major Nelson podcast to understand how important concepts such as XBLA are to the fundamental belief system (the "DNA", as Ross refers to it) of the 360.