Cheap Ass Gamer who keep track of Xbox 360 hard drive installs noticed that those who'd been admitted to the dashboard update preview program were seeing games take up markedly less space than before (a fact later confirmed by Digital Foundry). How much smaller? Well, DF noticed that King of Fighters XII and Raiden Fighters Aces went from 3.4GB to 703 and 484MB respectively, post update.
By DF's approximation, the update allows the system to be more efficient in selecting what non-essential data it puts on the hard drive. Though that results in a big savings in some cases, there are exceptions. Fable 2, for example, is no smaller post-update, leading us to assume Lionhead needed every inch of the disc for all that GOTY material.