No one would notice the USB Stick sticking out the back. HDD just cost to much to include with the Arcade. If they are going to include a HDD then the least costly one to include is the 250GB HDD. Do you think they really will sell an Arcade that costs more to produce than the 250GB 360 S just so it can have a smaller HDD in it. USB stick is the way to go. They could even create one especially for the back of the 360 S that hugs it like the 360 WiFi adapters did.
Its libraries that sell systems not a single game.