I believe something along the lines of streaming will be employed too, because with a 40GB or 80GB HD, it won't hold that many games.
I have a 250GB HD in my Xbox and it holds about 50 games, but of course, they're not going to have a 250GB HD in XBOX360.
Even if they did though, what if someone wanted to buy 51 XBOX360 games over Xbox Live??
This is why I'm pretty sure they're going to employ some type of streaming...also it will help prevent against piracy rather than downloading the full game on the HD.
I think that the 360 will include a HDD formater disk or built in software of some type. Plus, streaming a game, over many miles, would be REALLY REALLY REALLY REALLY SLOW! The lag would be unbearable. <