I think this is a good idea... but with the current storage available its just not feasible... I don't want to have to keep deleting stuff to make room for new content... only to have to re-download the game when my friends decide they want to play a game that I had deleted... and now that more and more ISP's are moving away from unlimited Internet connections, this would suck up my monthly bandwidth limit fairly quickly... It would great see larger size Hard Drives from Microsoft, but we all know they will over charge... It would be nice if they would just let us install are own Hard Drives... we can already copy data to and from a Microsoft Hard Drive, so their is no security benefits from using an official Hard Drive... Perhaps even a simple option to backup a downloaded game to an external Hard Drive... you can't play the game from the device, it would be just stored their... and they could encrypt the Game Data so it can't be tampered with... when you want to play that game again the xbox would check online to see if the game belongs to you and restores the game to the xbox's Hard Drive...
The only real thing I worry about is in 10-20 years... assuming my 360 is still running... *grins* ... will Microsoft still have their XBL Servers up and running so I can download and play my legally purchased content... don't we all just love how DRM screws us over every time....