How is Android going to catch up with the iPhone's 3d games (or even 2d games) without more internal memory or the ability to install to external? In the two months I owned an iPhone I downloaded over 2 gigs worth in apps. Myst on the iPhone alone is a 1.5 gig install. Half of the top iPhone games are over 10 meg each (
Top20 iPhone Games Analysis 08/2009).
CURRENT Android apps don't need more than the few hundred meg they have to work with. But with the existing limitations, they will not be able to compete against the iPhone in terms of graphics/sound quality.
I agree, the limitation doesn't really matter when it comes to multimedia, or even non-game apps (though I'd be willing to bet that the average non-game iPhone app is larger than the average non-game Android app; especially the professionally designed apps). But I don't see Android ever catching up to the iPhone in gaming without unrestricting the external memory.