Awww, Microsoft, did you finally give up on your proprietary storage?
For those who aren't familiar, the hard drive you strap onto the top of your XBOX 360 is an ordinary laptop hard drive which could be bought for far less than the Microsoft-branded version.
...it could be, if they didn't intentionally prevent you from doing so. The XBOX and the hard drive have to do a special handshake first, which ensures that you can only use the Microsoft-branded (and marked up) version. Some people have found ways to get ordinary off-the-shelf hard drives to perform the same handshake, but it's almost identical to modding your XBOX.
Microsoft will tell you that it does this to prevent cheating, and that may be partially true, but considering the amount of money they charge for a 120GB hard drive compared to what one normally costs, it's clear that they are profiting from this as well. They are taking commodity hardware and making it proprietary in order to create scarcity and raise prices, which is probably the most anti-competitive thing a company can do.
And as icing on the cake, years after their initial release, they start allowing the use of commodity hardware (USB drives) and they call it a feature! That's right, we've finally unlocked what should have been available all along, and we aren't even charging you for it, because that's the kind of nice people that we are.
The 16GB limit is interesting too. There are already several 64GB flash drives on the market and sizes continue to increase. You can also use USB hard drives, which can easily go into the terabytes. Why the 16GB limit? The first hard drive was 20GB and they are up to 250GB models. A flash drive works essentially the same as a hard drive -- no special file system considerations need to be made. So if there's no practical reason, why intentionally limit them to 16GB?
Oh, right, because they still sell hard drives at ridiculous prices. Why would a person buy an XBOX 250GB drive for $130 when they could buy a generic 250GB portable hard drive for $60? But with external drives limited to a total of 32GB (and a single one at 16GB, which means wasting 2 hard drives just to get 32GB), there is still no practical replacement for the overpriced 250GB hard drive.
It's awfully nice of Microsoft to go through all this trouble for us, but it would have been even better if they didn't try to screw us in the first place and if they didn't insist on continuing to do so now.