As far as I know, the larger HDD is used for gaming like you stated. Obviously it can be used for downloads, music and such but it doesn't influence BD playback at all. (You'll get all the codecs including the DTS-MA, released this coming Tueday) So if that's all you care about, I'd recommend the 40 gig.
I also upgraded to the PS3 (40gig) from the S300 and never looked back. For the price, it's currently the best player on the market.
