In a recent chat with CVG, Bourne Conspiracy lead designer Rory McGuire flat out said that Microsoft made a "mistake" with their decision to not make a hard drive mandatory in all Xbox 360 models. McGuire told CVG that "in retrospect I wish Microsoft had made the choice to have [mandatory] hard drives like Sony did with the PS3." McGuire further went on to explain the development advantages of having a HDD saying that "if you have a hard drive, the whole game loads faster. Obviously you'll be facing a short install time, but the developer benefits from it and you definitely benefit from it as a player." Take that Microsoft!
On second analysis, it's entirely possible that Microsoft could make HDDs mandatory in all Xbox 360 consoles by axing the Arcade and taking out another $1.9 billion hit to ship 20GB HDDs to Core and Arcade owners. Makes sense to us.