This issue would be resolved with mandatory installs. But then this would screw over all the HDD-less 4 GB S Model, Arcade and Core owners.... It's bad enough that you can't play the online co-op mode for several high profile games (Halo: Reach included) without a HDD.
Some would say that Microsoft was short-sighted for going with DVD and a HDD-less sku. But back in November 2005, Microsoft made the right decision. They put out a $300-$400 Xbox 360 at launch a year before the PS3 while the PS3 was $500-$600 a year later. That combination of more affordable pricing and the year head start played a role in the Xbox winning (as well as third-party support and the difficulties third-parties had with the PS3 at the beginning). It's like disolitude said. The Xbox 360 is already 5 years old (around the length of a typical console generation). It's storage limitations are starting to show the hardware's age. If third-party publishers don't want to work around the issues, they are free to release PS3 exclusives or gut out content from the 360 version and make it exclusive to the PS3. They have that choice. They just won't do it because they know that they'd be walking away from a lot of money if they alienated the 360 base like that.
And Microsoft would be foolish to come out with a Xbox 720 anytime soon because there is no need to do so until third-parties are really serious about defecting/favoring the PS3. This isn't happening.
