Microsoft's Xbox Series X and S consoles (opens in new tab) have specific requirements when it comes to using expandable storage. Titles that are optimized for Xbox Series X|S and Velocity Architecture can be stored on USB 3.0 drives but can only be played on the internal PCIe 4.0 NVMe SSD or the external Seagate SSD carts. Games that aren't optimized, such as Xbox One, Xbox 360, and original Xbox games, can be installed and played off of USB 3.0 external drives larger than 128GB.
It's worth pointing out that the 128GB requirement is lower than the 256GB minimum requirement that once was specified for the Xbox One and Xbox One X. This has changed with the updated Xbox UI, which is available on both the Xbox One and Xbox Series X|S consoles.
As for why Microsoft is not allowing games that are optimized for Xbox Series X|S to be played on USB 3.0 drives, there's a reason for that - speed. Both consoles exhibit enhanced loading times, enabling games to load much quicker than their current-gen counterparts. They also feature a game-changing feature called "Quick Resume," which allows gamers to play one game, then instantly switch to another in seconds.
While USB 3.0 external hard drives are fast, they're a far cry from speeds that have been noted for the Xbox Series X|S. Games that took minutes to load on the Xbox One now load half the time or less.
|Game||Xbox Series X||Xbox One X|
|Destiny 2||43 seconds||1 minute, 53 seconds|
|Sea of Thieves||20 seconds||1 min, 20 seconds|
|No Man's Sky||1 minute, 27 seconds||2 minutes, 13 seconds|
|Assassin’s Creed Odyssey||30 seconds||1 minute, 7 seconds|
|Warframe||25 seconds||1 minute, 31 seconds|
|Final Fantasy XV||13 seconds||1 minute, 11 seconds|
|Red Dead Redemption 2||38 seconds||2 minutes, 8 seconds|
Needless to say, this is why Microsoft wants everything to run off the internal SSD or external SSD carts.
The Xbox Series X|S next-generation consoles will launch on November 10th, 2020. The Xbox Series X is priced at $499 and includes a 1TB PCIe 4.0 NVMe SSD, while the Xbox Series S is priced at $299 and includes a 512GB PCIe 4.0 NVMe SSD.