This has kinda been touched on alittle, with the ability for the ipod to have internal storage and not external, it opens up alittle more ability to create games that are more sophisticated. Once they get the apps2SD working (i believe they are working on this as a native thing for the droid) it will allow for such games for us also.
I don't know yet if this is a major issue.. but iPhone games run natively on the phone, where as the Android games are Java based. Still not sure yet that it will make much of a difference in performance, but Java for games is generally a lot slower. Hopefully that is not completely true tho.
Java is definitely one of the issues - it is difficult for java to interact with the machine compared to how it is done on other devices.
The SD card thing isn't really as big an issue as people are making it, as I understand it - games have the ability to be installed on the phone, then large amounts of game data can be installed by the game onto your SD card...
Honestly, I would say the biggest issue is a lack of interested developers. Thus far, the platform has been out for 1 year, with most of that time spent with only 1 or 2 android phones on the market. Not very attractive to developers. Obviously in q4 2009 this is likely to change, since developers will be encouraged to cash in on the large number of new users brought to android by new carriers and phones.
Be patient. The stage is set for huge amounts of android development, and the high water mark is nowhere on the horizon.
Yeah I've been concerned about this as well. Games don't need a ton of space to be polished. The best quality games I've played so far are by Hexage. Totemo and Buka are examples of games which the developers took the time to make sure they were done right. You don't need a ton of space to make a good game. There are a ton of games around 1MB on the iPhone that are extremely well done. It's about the complete package, music, ui, responsiveness, etc.
I asked Hexage if they were making any new games for Android soon, and they're making a strategy that should be out in December. Can't wait to see it because they're the only ones who are getting it right IMO.
Flying Aces is also a decent game, but is a complete ripoff of the iPhone game. And it's still not anywhere near as polished or as nice as the iPhone game. And the iPhone game Flight Control is only 7MB. There is plenty of room on Android for a game that size. The developers just aren't putting in the effort. Hopefully we'll start to see some more competition coming to the platform and developers will have to put more effort in to make sure their games stand out.