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I've said it before, but a fusion of the two would be perfect. By tapping the d-pad you get the old Oblivion/Fallout hotkey menu. Hold it and you get the Skyrim favorites menu. They could even give each direction it's own list to help cut down on the massive clusterf*** the favorites menu can become.
I do not. The 360's D-Pad sucks so badly that I'd use up two slots with the same thing so I wouldn't accidentally choose the wrong item. However, this system makes it to where I can hotkey a bow bow in the left slot. I just hit it again when I want to revert back to melee. Then the right slot is a fallback shout I use when something is up in my face and I want him out.
The drop down menu is great for allowing cool headed decisions in the heat of battle without the clutter of the main menu. I've saved my ass loads of time by sitting there for a second and weighing my options. I don't play with auto saves either, so this is a play to win, or lose fifteen minutes situation.
Check my FictionPress: http://www.fictionpress.com/u/882728/ I love Rias Gremory.