The size limit for Xbox Live Arcade games has been growing for a while, and now the only limit is imposed by the system itself.
Microsoft has revealed that 2 GB is the current size cap for Xbox Live Arcade titles. It has nothing to do with Microsoft, and is instead a technical limitation of the way the system works. Recent titles such as Shadow Complex (awesome, by the way) and the Command & Conquer: Red Alert 3 Commander's Challenge (starring Ric Flair, by the way) have totally bowled over the recent 350 MB limit, leading to questions about if that limit was still in place. Apparently not, and with good reason now that the 120 GB Xbox 360 Elite is the standard SKU being sold in stores, and with a relatively massive limited edition 250 GB bundle on the way.
For a little history, when Microsoft first introduced Xbox Live Arcade, there was a stipulation that no game placed on the service could exceed 50 MB. This was no doubt a challenge to certain developers with bigger plans, but was likely deemed necessary when the Xbox 360 only had a 20 GB hard drive, around 6 GB of which was used for backwards compatibility and other system operations requirements. Microsoft had also said that another purpose for the limit was so that the service was more about smaller experiences, rather than big budget masterpieces.
The limit was later raised to 150 MB soon after an exception was made for the release of Castlevania: Symphony of the Night, which just couldn't fit within the 50 MB limit. Exceptions were again made for certain titles that went above the 150 MB limit, including Super Street Fighter II Turbo HD Remix. The cap was next raised to 350 MB, which was broken by titles like Watchmen: The End is Nigh.
I like how Microsoft handled these limits, at least publicly. If a popular game had to go over the limit, the company allowed it. After raising the limits, if certain titles still went over , Microsoft allowed them to again. Now, Microsoft acknowledges that larger experiences are in demand and can be massively popular on Xbox Live Arcade, such as Shadow Complex which set sales records. Artificial limits just don't fit anymore.