Flash has several advantages:
Cheaper unit cost (at ~32GB and under)
Smaller
Quieter
More durable
I would guess that a very significant proportion of xBox users don't use more than 8 GB (especially since Microsoft sells the Arcade 360 :-) ) Think about the number of people who never go online with their console.
The hard drive size on modern consoles are vast overkill for most people, and are only so big because the unit cost on a 50GB and 500GB hard drive is the same.
I do fine with a 4GB flash drive on my 360, though I'm not a heavy gamer with that system.
With SD support and external HD support, I'd prefer Nintendo to ship with flash.
The only other option I would like is a hard drive without an optical drive, with a Steam-like service. That isn't going to happen this next generation though.