Space on a home PC is cheap, but on a server costs a lot more - remember the admin is typically hosting a few sites on the machine, and is doing ( if they are responsible) a daily backup of the site. That takes a very expensive tape drive, and a lot of expensive and temperamental tapes, as well as changing them out and keeping a monthly rotation. Space on these tapes costs way more than on spinning glass, so the space per server is limited.
Costs for hosting rise if the bandwidth goes up due to large images, so keeping them small is better.
As to Flash, I am buying a 512K SD card for $1 retail, and find them useful as give away stuff. If I was to buy in 100 lots, they would be cheaper.