According to a recent blog post from Microsoft, Xbox consoles are set to support external drives exceeding 16TB. This upgrade will first roll out to users in the Xbox Update Preview program, granting them access to a new firmware version that allows for significantly larger external storage solutions. This is a major advancement, moving past the previous 16GB limitation. After testing, the update will eventually be made available to all users.
The Xbox Series S|X has faced challenges when it comes to storage capacity. At launch, the consoles only accepted officially licensed internal drives without the option for external game installations. As game sizes continue to balloon, 1TB of storage can only accommodate a handful of titles—if you’re fortunate. For example, the Halo: Master Chief Collection can take up nearly 140GB on its own.
External drives larger than 16TB will be formatted into several partitions, appearing as multiple devices within the storage menu. This configuration presents a fantastic opportunity for better organization of your game library; for instance, you could categorize games by genre or franchise.

Interestingly, Microsoft has not specified the new storage limit. It is conceivable that there might not be one, potentially allowing users to connect their Xbox consoles to home network-attached storage (NAS) devices. If this is the case, your Xbox could transform into the all-in-one media and gaming hub that Microsoft envisioned during the Xbox 360 era.
If you have a large external hard drive lying around, good news—you can use it! However, if it’s already formatted, you will need to reformat it (which will erase all existing data) before it can be utilized with your console. Be sure to back up any important files before proceeding with the reformatting process, or else that data will be irretrievable.