The guy with hundreds of gigs of storage is not the typical music listener Paul. Not even close.
The typical guy is the iPOD user. He's the one who they're targeting, and that's the mass-market.
The key is having the display on the head unit. It appears VW is doing that from the article.
That's MISSING on the Phat system in most OEM stereos. Yeah, it works on a Kenwood, but not in many if not most of the OEM incarnations. It sure doesn't on the VWs. I need VIOT on my VW because I can't SEE what's going on with the unit and what I'm listening to, and even then, all I get is artist/genre/album - not track announce.
I think this is much larger than you believe in terms of doing damage to the "embedded" marketplace.
I'm darn geeky myself, and for me, this is kinda "ho hum." But for the average Joe who drives an hour to work and back each day this is the big deal - he can go stick his tunes on a USB dongle that is about the size of his thumb and change it as he wishes, but play it everywhere. Samsung now has a new portable 1GB device that's amazingly small, and that, combined with this, gives you "everywhere" music. Or, if he has an iPOD now, he can plug that in and be done with it.
That's the key that makes this attractive - one device that works everywhere, so you're never without it.