Up till now, the Arcade version of the console featured an internal storage 
of 16MB. This situation will now come to an end, a Microsoft spokesperson told Xbox360 Fanboy:
"We are constantly updating the console’s more than 1700 internal components. We can confirm that we are moving to internal memory for the Xbox 360 Arcade. The physical internal memory is the same size as the previous external memory units – 256MB."
The change was expected due to the launch of the New Xbox Experience, which needs more storage room in order to load properly. This is good news, but it’s certainly not the best one.
The hardware upgrade will still have gamers tied up to their external memory cards, should they want to make use of their saved games or content downloads on another console. And Microsoft will be more than happy to continue to sell such memory cards, won’t it?