I would also use that feature.
I have a 30,000+ collection of tunes on one of my spare PCs. So they are all indexed using UNC paths - all starting \\PCNAME\public\music\. And I have realised that I will now need to always keep the tunes on that same PC, with the same weird path, because of the library.
So YES PLEASE to a Media Library editor.
OR at least a published hack to be able to do this as a big "search and replace" action on a file.
(I have looked at the dat files with a hex editor before, and I can see all the details there... just not been brave enough to hack it yet.)
As to playing from an external hard drive: Shouldn't be a problem. I play my tunes over a 100Mbps network without any hassles. (BIG hint... buy TWO external drives. Use one as a backup, and one for "live" use... otherwise you will cry when that external drive gets knocked off your desk by the cat and kills all your tunes....
And yes - you will see a benefit of getting that 40GB of music of your main hard disk. Especially once you defrag.