He means no OS actually on the phone's permanent storage. Would get loaded into ram on powerup over the air.
Would be something like the carrier having a server that has rom images for all their different phones, when you power on the phone it would boot the os over network from that server. If an OS upgrade needed to be done on a particular model phone, the carrier would replace that model's rom image on the server and the next time you reboot the phone you're running a new rom image.
I don't know that I like the idea. fast data isn't everywhere, it will be close to everywhere some day but if you're powered off in a location without fast data (or without data at all) and need to make an emergency call that kinda stops you. Unless the phone did have some type of local load of a failsafe basic dumbphone/dialer/make calls only thing.
Also it would kinda suck if you upgrade to the next newest phone and want to use your old pxe phone as a throw-around mp3 player/camera/video player etc. Couldn't boot if you're not activated anymore unless it would boot over wifi->internet->manufacturer server instead of mobile network->carrier server. And even then you'd have to make sure you powered it up somewhere with wifi.
The advantage of more storage space since you're not storing an OS...I dont' know that you're thinking of that the same way I am. Flash storage is cheap, we're not getting big amounts of storage because it would be expensive, we're not getting it because they want to build in some planned obsolescence. (be grateful the oems didn't take another page from Apple's book and not give us sd slots or replaceable batteries or force old devices to run slow by way of bloated os updates)