SD cards instead of an internal HDD just makes far more sense.
1. They don't have sectors or heads so they'll fail a hell of a lot less.
2. They don't use electricity like a HDD will.
3. You can carry a handful of them in your pocket and they'll still weigh less than a 20GB HDD and they'd hold more data.
4. The place the option of storage in the hands of the player.
The only downside I can see is that, were I a hacker, I'd figure out a way to dump Rev games to the SD card after not too long (if they're small enough, which in this case is 4GB or less) or copy all of the games I've bought from their online store to it and then give them to my friends on the internet.
The problem is, when you give consumers options, you also inevitably give hackers options. The xbox was notoriously easy to hack and basically equated $500 worth of hardware for $200, and when you know MS loses a pile of money one each one, it's a great reason to pick one up.