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The point here is that a 60GB hard drive is not much more expensive than a 20GB at all. There are lots of costs in a HD (casing, spindle, motor, etc) that dont depend how big the platter is.

So cost to microsoft is probably like $25 for a 20GB HD, and $30 for a 60GB HD. There is not much difference at all. When 360 was first announced there may have been more difference, but now laptop HD prices have dropped and 20GB is no longer even made for laptops any more. They probably have to be specially made for 360 in fact.

It's the same reason why Sony uses a 40GB in the 399 PS3. The cost is surely roughly the same as for 20GB. Costs dont start to go way up until you get to 80, 100, 120GB.

So basically a 60GB HD upgrade is almost free, so there is no "choice" here between the 60GB or a price drop. This move is a no brainer by ms.