Since Harmony 1.0, we've had a special Harmony Media folder to store and retrieve media inside Harmony. Since 1.4, we have also had an expert preference called mediaFolderLocation which allowed a user to set an alternate location for the Harmony Media folder. In 2.2 we added automatic detection of the Playback Drive, a media drive from Orange Thread Media.
Neither the mediaFolderLocation nor the Playback auto-detection features were supported in the Mac App Store version of Harmony. As of Harmony 3, both of those features are gone.
The new "Additional media folders" feature, in Harmony 3 is much more flexible. It allows up to 10 additional sources of media. Those sources can be on an external drive (and auto-detection still works), on Dropbox or another sharing solution, or even on a network drive (although I wouldn't recommend it).
Harmony 3 also supports dragging media files from the Finder directly into a service. This is great for one off use cases that don't need to be stored in your Harmony Media folder.