Your argument is mostly valid, but it assumes a couple of premises that are likely to be false: 1. All (or even most) users fully utilize their entire 1 TB quo

Your argument is mostly valid, but it assumes a couple of premises that are likely to be false: 1. All (or even most) users fully utilize their entire 1 TB quota. In reality, the vast majority of users will probably not even use half of their quota. By the time that changes, hard drive technology is likely to have advanced, and they can start selling larger boxes. Then the cycle repeats. 2. The data on the drives is not compressible. While people certainly could store only compressed files, that's not very convenient, and the reality is that most people will have at least some portion of content that is readily compressible. Just by exploiting those two facts, the network can probably work without any external cloud assistance. But the smart way to design it would be to also have traditional cloud storage as a fallback. And that would be safer than traditional cloud storage, while still saving money since the fallback would only be used in special circumstances.