I dont find the 125 to 175gb to be a crazy number. It looks reasonable. I dont think Series X will be any different. OSes are not only the files, but a lot of additional space to do operations, backups, factory resets, updates, etc.
IRL, 625, or 700 or 1 full TB is not enough at all. To put an example, I have nearly 500 games on my Xbox One. I have a 1TB console + a 3TB external HD and I'd say im just OK.
On other thoughts, I think theres plenty of room to improve how games are installed. In example, Im playing New Super luckey's Tale, and based on the achievements, nearly 80% of the people who played it dropped the game before world 3 (theres 6). This is a pattern on most of games, based on achievements. Maybe partial installs (like, installing up to the average of completion) is a reasonable strategy.