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Most epub books are under 1 mb in size, so do the math. You are talking about storing thousands and thousands of ebooks.
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I have a book that is 47 MB in size. At that size there is room for only about 30 books. More than half of my books are over 1 MB. Books that have extensive hyperlinks, photos, maps or diagrams typically will be bigger than 1 MB.
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The library system on the Kobo is not that practical. No folders or subfolders. A large number of books just becomes too unwieldy to navigate.
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This is certainly a problem which Kobo needs to address since competing e-readers all seem to have some way of logically organizing documents.