just my take on the situation. not too long ago i speculated that MS would be looking to improve the Series S in a couple of possible ways. The simplest would be to increase its SSD from 512 to 1tb. Basically the drives used in the SX would now be used in the SS and the SX would also get a bump in capacity to 2tb thanks to larger drives being made in the smaller form factor. this is inevitable as we have see HDD sizes increase over the life of the 360 and XBO respectfully. [...]
[...] Putting in more storage, as prices come down over time. the PS3 came with a 40GB HDD for $499. Eventually a PS3 Slim had a 250GB HDD for $199. That is just how technology progresses. [...]
I think increased storage increases may well come. However, at the moment, it's a particularly costly upgrade. It is less costly in that it can be done without redesign of the entire console, but if Microsoft *does* decide to redesign the console then it might be more costly per unit to increase the storage than to increase the RAM or add an optical drive. So while I do think the 512 GB of storage does hold the Series S back somewhat, I think it holds it less back than the power differential between it and the Series X/PS5 does, and especially less than the lack of an optical drive.
I also question how much of an advantage these very costly storage upgrades would be. Surely upgrading the Series X to 2 TB isn't a necessity when Series X units continue to sell out most places, and the Series X already has a storage size advantage over the PS5 and its 825 GB SSD anyway?
Traditionally, HDD prices tended not to drop very quickly, they instead tend to get bigger for the same price. So it made perfect sense that we saw dramatic increases in HDD size throughout the 360/PS3-era. And less dramatically, but we also saw that during the Xbox One/PS4-era where the systems started the generation with 512 GB and ended typically with 1 TB (and Microsoft even experimented with 2TB mid-generation).
However, with the shift to SSD, I think we may instead see price reductions. That may work against larger capacity drives, as Microsoft and Sony probably *will* reap significant cost savings by holding the line on drive size. That's especially true for Microsoft that has a cost advantage with the Series S that they won't want to relinquish and already has a size advantage with the 1 TB Series X. So my guess is Microsoft will likely hold the line on size, at least for the Series X, unless and until Sony makes a move to a 1 TB (or larger) drive, especially since Microsoft makes money selling expansion drives, unlike Sony. So for a bunch of reasons, I think Microsoft may not make a move unless and until Sony does.
However, if Microsoft can swing a 1 TB Series S with an optical drive for the same retail as the PS5 Digital, that *could* be an interesting proposition that they might strongly consider. It would be an interesting contrast. More horsepower for the PS5 Digital, but more storage space and the ability to play disc-based games on a hypothetical Series S Disc. That might be a proposition that would sway some people towards a theoretical Series S that wouldn't otherwise go that way. That's less relevant now since all versions of the PS5 are in extremely high demand, so Microsoft might target the release of such a SKU closer to a point where they anticipate PS5 supply and demand catching up with each other.