"Increased market penetration of high-capacity, high throughput USB mass storage devices" led to the implementation, coming in "a 2010 Xbox 360 system update."
Going by the documentation, any compatible device must have at least 1GB of storage, with the Xbox 360 able to utilize up to 16GB. Each device will need to be specifically formatted--either partially or completely--to be used as an Xbox 360 storage device. Up to two devices can be used simultaneously for a maximum of 32GB of extra storage.
Peripheral maker Datel had previously accused Microsoft of monopolizing the Xbox 360 peripheral market after an Xbox 360 system update disabled support for Datel's cheaper (but unauthorized) MAX Memory Cards--a move it described as "nothing more than a pretext for forcing consumers to purchase [Microsoft's] own overpriced memory cards."
I have a dedicated USB Hard Drive on my Satellite Receiver. The company encourages customers to buy USB external hard drives, but also sells them to customers. The device is encrypted and you can't exactly hook it up to your PC to rip the movies, but I'm very fine with that.
1TB cost me $100 CDN. I was pleased as punch to turn my HD receiver into a PVR!