Ever since the 360 decided to segment their install base by producing one SKU with a HDD and one without, I've questioned if this decision would come back to being an issue for Microsoft. Lately, we're seeing one extreme though on the PS3 where Capcom installs a huge amount of data on the hard drive so that you would get a smoother playing experience. The installs produce a much better gaming experience in terms of waiting a lot less than the 360 version but it costs a lot of space. 5 gigs, while not that big of a deal on a computer, is certainly a lot worse on a console. Granted, you could put any size hard drive on the PlayStation 3 to ease this burden but the process is still a little bit more complicated than unplugging the current HDD and plugging a new one in. For that I wish Sony wouldv'e gone with a more simple method of accessing the hard drive like the 360 or even the PlayStation 2 but I digress.
Developers can't count on a 360 owner having an HDD so they can't force an install like PlayStation 3 games. With games coming out these days with higher resolution textures and more video, the 360's starting to suffer from the long load time effect that makes gaming on that console a little annoying. Capcom games are one example but Mass Effect might not have suffered the texture pop ins and long elevator rides if the game could've used the HDD to cache some of the graphics. And I'm sure Chuck would appreciate the quicker loading of the cut scenes from Lost Odyssey. Coming from the PC side of things, I've always found long load times annoying as I just want to load up a game and play. That's not to say PC doesn't suffer some of the same effects but it's not as prominent as the console area since you can install a lot of the main files on a PC.
In my opinion, the answer isn't a huge install or none at all but some place in between. For 360 owners, developers should allow an option of caching some data on the HDD when they first boot up the game. That way those that do have the HDD can benefit from the faster loading and seeking times of the HDD over the slower DVD drive to get through parts of the game faster. For the PS3, follow the PC side and ask how big of an installation do you want on your HDD. Some PC games let you install a minimal, normal, or full installation (including FMV) and I think this option would be a great way to curb the large Capcom like installs if you don't want it but still want to take advantage of the HDD to speed up some things.
The HDD can be used in both systems to benefit gamers. It doesn't change my opinion that Microsoft made a poor decision in not putting an HDD in every system but developers should still program their games to take advantage of it better if you do have one in place.