No, I am not comparing apples to oranges.
The cost to buy an entry level Xoom compared to an entry level iPad is $100 more regardless of the spec.
It is a lot easier to rationalize 16 fewer Gb when you are on the fence about buying a tablet than $100 more dollars.
There is a reason why the 3 series is BMWs most popular series of car and it is the same reason why the iPad 1, 16Gb model was the most popular iPad model.
To be competitive with the iPad, the Xoom needs to have the same entry price.
No, it doesn't need to be the same price. People can come into a store and a sales rep can tell them that for $499 they can store up to 16gb of apps, music, movies, and pictures on their device, plus whatever space they need if they actually create something (like a travel journal or something) and they have no way to increase it.
If the customer is fine with that, then ok, they can enjoy their new iPad. However, if the customer says, "hmm I'd like more space so I don't handcuff myself with just this entry-level amount", or "16gb doesn't sound like enough storage space, I'd like more", the salesman shows them a 32gb iPad at $599, along with a $599 wifi Xoom (assuming one makes it to market, of course). Now the sales rep discusses the nice upgrade in size to 32gb of built in storage space, but highlights the fact that with the Xoom, the customer has the ability to augment the 32gb of built in storage with an inexpensive microSD memory card (assuming the Xoom gets a functioning SD slot).
Now, the customer may feel that 32gb of built in storage will be more than enough for them over the life of their device, so it comes down to the user experience and the customer either goes iOS or Honeycomb. If, however, the customer thinks they may want more space in the future, they either spend $599 for a 32gb wifi Xoom with the ability to add up to 32gb of additional storage in a microSD card, or the customer can spend $699 right now on a 64gb iPad and again hope they don't ever find themselves with so much media that they are concerned with running out of space.