I actually work in this field; so I can explain the pricing.

When a publisher wants to sell their game, they communicate with retailers about distribution. They set a price they want to sell their games to the retailer - Close to the price we see it at in stores - & the retailer is free to raise it to make a profit.

Retailers, however, will set their own price, & offer to pay a percentage to the publisher. If the publisher refuses, they lose the visibility of being in the retail space. Wartmart, 1800 stores, has incredible visibility, but they take the highest percentage from the publisher, the deal could be declined, but they risk millions of potential customers. Best Buy & Toys 'R Us take smaller cuts because they want a large selection, but still leverage their visibility to negociate large percentages for themselves.

Smaller stores, like Gamestop, take the smallest percentages in an attempt to "woo" publishers into their gamespace. They have the opposite problem. If they are too aggresive, the publisher will refuse to allocate stock resources. This leads to higher then "standard" retail prices. This hurts them competitively: as higher prices cause customers to shop "Big-Box" retailers, which increases demand at those "Big-Box"; which in turn decreases the amount of product able to be allotted to smaller stores.

Microsoft is this same position as small retailers. In order to be successful, Microsoft needs to attract publishers. They aren't in any position to make pricing demands - Advantage Publisher. They demand full-price for their goods, or they won't put their content on the space. The lack of physical/transport cost allow publishers to take less money. Unchallenged, this equals out to be just under retail price. All digital simply means Microsoft won't have to charge above retail. Anything lower & they'd be giving it away for free, & it is a business after all.

Has Microsoft learned nothing from their Xbox Originals sales (or lack thereof)? The majority of consumers are not willing to spend as much as, or more than, retail for virtual content because virtual content cannot be resold, does not come with additional maps, characters, codes, maps nor any of the various other tchotchkes included with physical products.

To make matters worse, the 120GB HDD is grossly overpriced; by ~$100, based on a Newegg's current price for a WD1200BEVT. It's also too small to hold more than a handful of games, movies, TV shows and other digital content.

I'm waiting for them to throw a Gold-only subscriber requirement in there for good measure...

It's preferable to have everything on the hard disk for sure and digital downloads and the successes of digital downloaded media are well documented.

However 120gb isn't going to cut it in this environment for too much longer if Microsoft want this service to be popular. Not only that the price per megabyte of current storage solution needs to be looked at.

Maybe a more open firmware or formatting utility would be the way forward allowing users to provide their own storage solution, I know from experience with PS3 just how easy drives are to source and swap.

Either way, On demand service sounds really good and has been a long time coming. Nick is right, You'd have thought that it would have warranted more fanfare.

I have been putting it off, but now I need to buy a 120GB hard drive. I wish they were a little cheaper.