For a 32-bit game, as most games are for a variety of reasons, even a game that comes on one single-sided DVD (4.3GB) already has far more content that can be fitted into a 32-bit address space. And that's assuming the content isn't compressed on disc, and a perfectly optimal, load everything at once into contiguous address space approach. Many games now come on multiple DVDs, easily surpassing 10GB of content. In my experience on PC, once your address space approaches 2GB allocations will start to fail, and that becomes a hard limit, regardless of how much physical memory the user has.
If you do make the jump to 64-bit, assuming your engine supports it, that hard limit goes away, only to be replaced by an effective soft limit - as soon as virtual memory swapping begins to happen, the performance of the game will drop unacceptably. If the main process ever has to wait for memory to be paged back in, the frame-rate will stutter and glitch. Virtual memory might make that transparent, but it doesn't make it performant. It physically takes time to get that memory back from disk, and while you are waiting, your game has stalled. While it's possible to work around (with background pre-fetching of memory pages that you know you'll need soon), it's a difficult and unreliable process, and will still have performance implications.
The OS's algorithms for deciding what pages to swap out to disk have no knowledge of your game and what it is likely to need next. Furthermore, the OS still has to support other applications running simultaneously with your game, as well as the OS itself. Having to stall while pages are returned from disk is a massive performance hit, and it doesn't matter whether it's your game, another application or the OS that incurs it, the game's performance will suffer massively.
So regardless of whether the memory limit is soft or hard, memory is still limited. But even if you could just load everything at once, without hitting a limit of performance, there are still reasons why you wouldn't want to:
Your game takes far longer to load and get to an interactive state than it needs to, because it simply loads everything at the start and keeps it resident. You can load about 150MB/sec from a hard disk, and even the fastest DVD drive (24x) loads at 33MB/sec. That means the example 4.3GB DVD worth of content will take at least 30 seconds to load from HDD, and over 133 seconds to load from DVD. Those are unacceptably long load times.
Your game takes much more memory than is justified. If only 10% of the content is visible at any one time, holding the rest resident is simply wasteful, and prevents the user from using that memory for something else. Users are generally unforgiving of games which require a disproportionately large amount of memory to run properly.
Streaming assets from disk dynamically, whether in the background or synchronously during a loading screen, allows you to be far more efficient in your use of memory, with negligible effort and only a minor downside for the user. But it's an optimisation, and like any other optimisation it has diminishing returns the more you try to apply it. At some point the increase in memory footprint for keeping something resident is outweighed by the advantages gained from having it there without the need to load. But until that point is reached, it's better to load only what you need, when you need it.
