Considering that the price of a 4GB USB flash drive has been as low as 5 dollars on close-out specials, financially it wouldn't make sense UNLESS Microsoft decides to go into the Flash RAM business. The full Win 7 Ultra install DVD is 3.9GB large. Even stripped down it will be better than 2 GB so 4GB sounds like the right size for the Win7 USB Flash drive.
The price per Win 7 Starter license I was seeing for netbooks was around $3 each license in volume. That would mean the price of USB flash drives need to be much lower than that to make it possible to do economically.
Then think about what it would take to make a mass assembly line operation to clone the image onto USB flash drives thousands or millions of times! I suppose you could use something like Ghost to make 128 copies at a time through a massively wicked USB "router". The time it would take to plug in and out all the USB flash drives would be tremendous!
Actually its been done sort of by SanDisk. They have a number of U3-based USB flash drives that have a "read-only" partition that plays like a CDR. When its up and running, the USB flash drive looks like 2 drives, a CDR and a HDD. It has some software on it that makes Windows XP Pro work better when it comes time to unmount the USB flash drive. Actually fairly nice.
I don't know how they are doing it. There is likely some sort of JTAG software interface hidden in "plain sight" connected to the USB signal pins. With special commands to special hidden registers, part of the drive is marked as read only.
If you delete the partitions you kill the U3 interface. If you are careful, the read-write partition can be formatted in NTFS and it coexists nicely with the U3 CD-ROM type partition.
I could see SanDisk turning out millions of Win7 USB flash disks on the U3 read-only "CDR"-like partition for Microsoft. But to do it for a price the netbook owners will be willing to pay, hmmm, I don't know about that.
I think most likely Microsoft is going to make the netbook owners that want it on their old netbooks eat the price. It probably won't be available in anything other than download ISO form. Buy your own USB drive. Buy the download on Shop Microsoft. Copy the image over to the Flash. Use an updated tool based on ufdprep.exe to prep the flash drive. It will have a file converter program that will open enough of the image to mount a bootstrap loader on the netbook and then mount and install the ISO onto the system hard drive or internal flash drive or SSD. (Sounds like a job for a really small install of Linux!)
Don't expect this function above to be available until late in the year until after the retailers get an idea how netbook sales with Win 7 pre-installed are doing. Microsoft will think of the USB based install to be a loss-leader, a way to get users hooked on Windows 7 so they'll buy it pre-installed on their next computer or as shrink-wrap for their old desktops or regular laptops. That's what the Win7 RC is by the way, a form of digital "crack" to get the neighborhood geeks all hooked. Call it Windows 7 Express!
Its prettier than XP Pro but not faster. It is definitely better than Vista on substantial hardware, like a dual core CPU with 4 GB of RAM.
I have no clue how well it will work stripped down enough to work on a netbook. I've already had my taste of "Windows-7-crack". Would I buy it?