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"Then developers would be abandoning the entire Core base. I'm sure there's a large amount of casuals out there who have yet to by an HDD"

Indeed, and in fact, MicroSoft is repositioning the Core again as the Arcade version, so don't expect a solution from them.

But this "with DVD9 without HDD" design is an essential mistake in the XBOX360.
If MicroSoft was really looking at the long-term, they should at least put a 100GB HDD in every XBOX360 so developers could bypass the storage restrictions of the DVD9 when they create a free-roaming game.