its not over priced if you buy a premium/pro. but deffos is if you buy it on its own you really need a xbox with a hard drive a 20gb at least, most people i know who got arcades or cores ended up buying the hd in the end and ended up getting ripped off as the price on its own is stupid, but with console is very reasonble espieally with all the other extras you get, like headset, hdtv leads, and controllers are also wireless, if you compared the difference in price from the arcade to the 20gb or 60gb model compared to the price of buying all the extras on top on they own then its a great deal.
Also in order to play certain games online you need a hard drive due to various updates that are downloaded onto your hard drive. If thats what you were going do and only do, then a 20G HD would be fine, but if youre into downloading movies and demos, then you'd probably need a bigger drive.
oh and you can put full retail games on there as well:
Xbox: Can only do this by purchasing select titles under the Xbox Originals section of the Games store.
Xbox 360: After the New Xbox Experience (the next big (system) update - which actually is stored on the console itself, NOT the hard drive (that only stores game updates)) is installed, you can install any retail game to the hard disk. This results in a decrese in load times, less overheating, the DVD drive won't spin, among other things. You must have the disc in the drive to play, though.