I have both an 80Gb iPod Classic and a 32Gb USB stick and have tried both (this is with the Pro Nav system).
Sound quality - I can't detect any difference between iPod and USB, but then I only have the standard audio setup so I couldn't say if the BMW or HK upgrades would expose any differences.
Interface - I don't have the BMW Mobile Apps so the iDrive interface for both USB stick and iPod is the same. Album artwork displays ok on the iDrive screen from both sources (all my music is fully ID3 tagged complete with album artwork).
Convenience - For me, USB wins hands down. Plug the stick in and forget it until such time as I may want to add more music or delete something I never listen to. I tend to use the iPod when out & about so it's easier to just have the USB stick always plugged in rather than having to plug/un-plug the iPod and fiddle with cables. Have toyed with getting a 64Gb USB stick as they're so cheap these days - reckon that would keep me going for months given how many tracks you can fit on