I missed this. So no more than 2TB total with 1TB external stick?
Just to clear up potential confusion: the flash controller is the chip that is directly soldered in contact with the flash chips. That MS picked this controller means that they can right now, with no other changes, make a console with 2TB storage if they want by just putting in more chips. Also, assuming they are using the same controller for the add-in storage, they can also make a storage chip with up to 2TB.
Them using this controller in no way limits the total amount of storage that can be attached to the console. And if they later move on to controllers with more maximum capacity, they can make base consoles/expansion sticks with more capacity.
I wonder if there’s any practical limit to Sony’s PCIe 4 slot, given their controller still needs to mediate the traffic in the end.
That's not how it works. In the system architecture, Sony's internal controller is attached to PCIe too, basically logically identically to how the add-on storage will be, right next to it. They said they are using NVMe, which iirc can effortlessly address up to the petabytes, so that will never be a limit. (And note that while the protocol MS uses might be deliberately made incompatible with normal NVMe, I would bet dollars to peanuts that if it's not just NVMe, it's just NVMe wearing shades and a trenchcoat.)
It's important to note that technically, the XSX/XSS and PS5 solutions are almost identical. They both have a PCIe hub (either on the APU or possibly on a lower-power "south bridge"), which has fancy decompression hardware, and two interfaces, one of which connects to a flash controller that's soldered on board with it's flash chips, and one of which connects to an outside port.
The technical differences are that in MS, the two PCIe interfaces are apparently PCIe 4.0 x2, whereas the Sony solution has two PCIe 4.0 x4 ports. The Sony controller bundled on die is also better, with more channels to make sure it can make use of that extra bandwidth.
The non-technical business differences are that Sony is openly calling their expansion port m.2 NVMe, allowing you to plug any drive compatible with the standard into it, but of course you should only limit yourself to ones fast enough to match the internal one or your experience will be degraded. Sony will probably offer some kind of certification program that lets good enough drives plaster
PS5 compatible on the packaging, but you do not have to limit your choice to drives with that wording. In contrast, MS uses their own form factor and port, probably requiring royalties from companies who make "XS memory sticks".
The difference in user experience is something that has played out many times in past generations: The plus for the Xbox style is that anything that can be plugged into the port will just plain work. The plus for the PS5 style is that end-users will very likely be paying a substantially less for the storage.
