Considering I had been playing on an Xbox 360 with a 20GB hard drive since the console was released, when it was time to upgrade I figured I would save a few bucks and go with the 4GB version. With support for up to 16GB of USB storage I ended up with virtually the same amount of space I had before, which I was perfectly fine with. However, it looks like Microsoft has upgraded flash drive storage from 16GB to 32GB.
The upgrade came as part of the recent dashboard update and, even though Microsoft was quiet about it, it looks like an upgrade that's here to stay. Speaking with Joystiq, a Microsoft rep recently said, “Yes. The more our customers use their profile and download digital content, the larger the file size necessary to store that content and move it between consoles gets. Therefore we increased the size of the memory to enable our customers to take more of their Xbox profile with them on the go.”
With Nintendo's upcoming Wii U allowing users to connect just about any size hard drive they want, it seems like Microsoft could have taken this opportunity to upgrade the USB storage limit even further. Then again, they do have a lot of branded hard drives they want to sell, so that probably won't happen any time soon, if ever.