You are correct. A 1TB drive can ONLY hold 100 dvd's approx. I have been collecting movies for many years now and it would take over 100 - 1TB drives to hold the 10,000 + movie collection. By compressing with a quality codec to the specs I gave above, you will save 90 1TB drives without losing quality. Someday, if my wallet permits, I will have every movie ever made, provided I do not go bankrupt first. BluRay movies are compressed to start with but hold very high quality compressed with a good codec to approx. 2.5GBs. I might add that with Handbrake (free Open Souce via sourceForge), you may want to recode the dvd's a second time to a resolution/frame size/rate for your Iphone/crackberry etc. A great quality file will be approx. 50MB per 45 minutes of video. The only drawback is that this file type is not suitable to recode back to a dvd due to the severe compression. I recoded the entire 8 years of the series charmed (to mp4/m4v, .mov works good if only for apple) and fit all 200 est. episodes on an 8GB Iphone and they play in super hi quality. I am currently preparing all 9 years of Xfiles for my wifes Phone for Xmas.
For the audio, mp3's , like jpg's are lossy formats. They are named this because they lose quality/data with every copy. By their very nature of compression they discard most/over 80% of the data upon creating a lossy file. Wav's/flac's, camera raw or dng's are lossless and lose nothing regardless of how many copies are made because these file type do not use compession (for all practical purposes).
I had the same idea as the origional poster about 10 years ago and have finally found a reasonable method to work with audio/images/video.
If you only have 100 or so movies then size does not matter but if you have 10,000+ videos from dvd,HD, or BluRay, then you need a good system to start with.
Rosewill makes a great HD tower that can hold 8 HD's for a current max. of 8 2TB drives. (you can raid smaller drives anyway you wish) but widows can only handle arrays up to 2TB max. (so you cannot setup a raid-0 array with 2-2TB drives) if my memory serves me correctly. You only need an array/raid for backups or encoding. For storing files you are est using single non-arayed drives or at most, a raid-1 array for backup purposes only. This can potentially hold up to 20,000 movies for a media center. Now imagine choosing any of 20,000 movies and with 1 click,be watching it within 10-15 seconds.