Microsoft has just unveiled a new video showing how external storage will work on the Xbox One. Users will need a USB 3.0 compatible drive with at least 256 GB of memory on it. As soon as you connect a drive to your Xbox One, the console will recognize it and will ask if you want to format it. Doing so, of course, will delete all your data on the drive, but from that point on you can easily install whatever you like onto the USB harddrive.
In fact, you can make the USB harddrive your default install location as well. Doing so will immediately make all downloaded content install to the external drive first. Then, when you run out of space, the Xbox will immediately start installing games on its own hard drive until you connect a new piece of external storage.
Users will also be able to move all their internal content to an external drive at the press of a button. In addition, content on an external harddrive can be brought over to a friend’s house and played on their Xbox One.
Source: Microsoft