Wow, that's a cool hack. I wonder if they did more stuff like that to go around Xbox limitations. Reminds me of Crash Bandicoot hacks for ps1 :))
It is indeed a story of creativity in design.
This is because the original specification would have had a memory card slot in the controller but it was too expensive. They also had considered using floppies for storage, but they were too unreliable (and my experiences with 1.44MB 3.5s definitely agrees that consumer-grade cheap disks sucked hard)