The only games that don't benefit from such a system are those that load 100% forward (no directional freedom). But in that case streaming becomes that much easier to optimize for, because you always know exactly what is needed in next moment.
I don't remember how much space is allowed for cache, but I do remember Burnout caches the entire city in less then half an hour of playing, so it can't be "that" small (and that game is certainly on high-end of movement speed across game-world).
In both of those cases you still deal with texture pop as you are first running around in the game so the pop uglyness is still there at least initially, compared to a full hdd install where it wouldn't be (or at least significantly less). Also, take a game like MW2 online where you get in a map, play 10 minutes, move to the next map, rinse and repeat. In that style of play the benefit of a dynamic cache is somewhat minimized compared to a full install. It's effectiveness eventually kicks in, but then you are moving to the next map and the texture pop starts all over again as the cache is emptied and repopulated. Or when you die while playing the single player game, it snaps you back to a checkpoint and there's that texture pop again all over again, a dynamic cache can't deal with that. Again an hdd install solves that, or dramatically reduces it.
Except a dev/pub would just release games that are basically unplayable without install from that point on. How do you think PC install "system" came to be?
That's easy to fix, certification fail if you don't run without full install
I realize why partial installs came to be, something had to be done to deal with slow blu-ray seeks. But they can still allow mandatory partial installs just keep them really small (maybe 1gb) so they don't become overly intrusive, and allow a full install option for those who've got the room. Games that benefit from a small dynamic cache can still go ahead and do that. There's lots of options available given then the hdd is standard, they just need to unlock that last option, the full install.
What about the way Fallout 3, Oblivion and Wolverine do installs on PS3? On boot up the game installs (partially I guess) to the HDD, but does so in the background. If the user doesn't have enough space, they are told, but you can play without the install with longer load times. What is so offensive about this method that so few games use it? Its far less intrusive to the player than the popular way, and operates on the same priciple as 360 installs (if you have the space, loads will be faster).
How long do they take to copy their data? It's a certification fail if a game takes too long to boot, and the length of time allowed shortens over the life of the console. If you can do all your copying, setup, etc and boot in time then it is a viable option. Of course you will be compared to the 360 version which doesn't have to do that and hence will look less favorable in comparisons, something which no one wants. You know the drill, it would lead to the inevitable comments like "lazy devs don't optimize load time for Cell", "they were paid by m$ to do that", etc...
Oblivion and Fallout are good candidates for what you mention because their scenery doesn't really change significantly per unit time. Or worded differently, new textures are required fairly slowly as you walk around in those worlds, there isn't a lot that changes dramatically. Not sure about Wolverine, only played the demo. I wonder if Uncharted 2 does that, it does seems to take a long time to boot up.