A better idea would be an on-demand iTunes streaming service. Then you wouldn't have to load up your hard disk with all of that downloaded content (unless you wanted to keep some of it there). Of course, right now, we don't really have the infrastructure to support such a service of high definition content delivery at a real-time rate of delivery (so maybe Apple would think to look into addressing this).
Even better would be to just make all iOS devices with 8GB of FAST flash memory. Then, have a service to deliver the big purchases when you need them. The new Apple TV is a step in this direction. Again, however, we still don't have the infrastructure to support this rate of data usage.
As far as your idea for making the hard disks slightly smaller, it would hardly do any good. Hard disks are already dirt cheap as it is. I'd like to see solid state disks become more mainstream (the reliability has to improve and the price has to drop first) and for 10,000 RPM drives to become the new standard for hard disks (and almost as affordable as 7200 RPM drives).