Bigger internal drives have been a very common thing on the consoles with the passing of years and well with more games available more space is needed to keep them. So they could still have the series S with 1Tb internal and sell well on the expansion.
True, yet Series S 500GB for $249 will sell more than Series 1tb for $299. It's the 'get in the door' machine. Price is the most important factor. And MS is already going to offer a cheaper 512GB expansion.
$140 for 512 GB
$220 for 1TB (current price at bestbuy)
$400 for 2Tb
So cheaper storage is already coming. I guess MS rather have you buy a cheaper Series S with the cheaper storage expansion option. Next to controllers, the margins are on those expansion cards.