You make a very good point that I didn't think of, if the main storage options were in the dock and not the console itself then that would allow for external (or maybe even internal) storage options wether that would be SD cards, HDD's or USB drives and when on the go you would only be able to play the games that fit on the internal storage and the cartridge's you have on you physically.
That would work and keep costs down, that's a great prediction mAcOdIn.
Well it's what WordAssassin and Casiopao are talking about.
As a handheld it'll undoubtedly have some built in storage. Like someone mentioned it'd likely be used for saves or small games. It'll also undoubtedly, like the 3DS have an internal swappable cartridge of some kind, whether it'll be an SD card or something fancier who knows. Those will all be within the switch. To even remotely function as a 3DS replacement it has to have those inside the switch itself. Just using the Vita as an example a SD card ill not be enough. Since the Switch is even more powerful than the Vita and will likely have games even larger, yeah storage space will be an issue.
From the onset, as a handheld, we can all but assume that not every game in your collection will fit on one card, let alone what'll likely be anemic built in internal storage. You're going to need multiple cards with you if you go digital.
The question then is for the people who use it as a console. If they never plan to use it on the go will they have an external storage option so that they can use their entire library at any time or not? If the answer is yes, then like WordAssassin and Casiopao were alluding to then clearly anything not on local storage(in this case a physical game cart, internal storage or removable SD card) will not continue to run when the system's removed from the dock, which is going to lead those owners to have to manually manage what games are on their external storage and what games are on their internal storage whenever they plan to use it as a portable device.
Again, that's assuming they even give us the option of using external storage. Granted, the ability to pick up the console and play on the move is something the other system's do not have, but having to prepare which games are portable ready would be an inelegant solution at best.
They could just as easily decide it's not worth dealing with angry consumers who've lost their game progress because they pulled the system from the dock, and thus the external storage holding the game itself, and lost all their progress and decide, "fuck it, no external storage for you at all" and people using it as a console only will also be limited to what fits on the built in storage, is on the game cartridge or removable memory card(again, whatever that may be be it SD card or some proprietary bull shit). Which is also an inelegant solution to say the least.
So what that means however is that no matter how you look at it this system is going to have some inconveniences from the get go if you plan to use it as advertised and constantly switch from console to handheld. Either:
a) There'll be no external storage so users who use it like a console will get annoyed at no longer being able to have their full collection available at the push of a button. A relatively new concept to be sure but a nice one.
b) There'll be external storage but anything on it won't be able to use the selling point of also being playable on the go on the fly without transferring it over first. An annoyance for sure that may also lead to lost game progress to people who try it on a game they haven't moved over to internal storage.
c) It doesn't work as advertised and you have to initiate something first before you can undock it that'd tell you to copy the game to internal storage if need be or tell you that it's ready if it's already there. In other words it's not quite on the fly.
d) Or the onboard storage
only houses the game you're currently playing and a game played off any external storage is copied over during play to ensure that it's ready if you decide to pick the console up later. Which would mean you'd have to wait a bit before you could pick it up and play it portably but that'd be relatively transparent to the end user. I actually like this method best but it presents two issues.
d1) The size of the internal storage would then be the maximum file size of Switch games period.
or
d2) We'd see a weird situation where some games not bought physically on a cartridge or on internal storage wouldn't support portable play.
Seems likely you're going to have to manage storage on it pretty closely.