His most devastating move would be this..

Microsoft hasn't created a character worth a damn themselves. All of the characters from the games they would use would come from Halo, Gears and Rares games.

My list would go like this though.

Bungie, Epic, Rare

Marcus Fenix (Gears)

Master Chief (Halo)

Cortana (Halo)

Arbiter (Halo)

Joanna Dark (Perfect Dark)

Fulgore (Killer Instinct)

Jago (Killer Instinct)

Banjo (Banjo Kazooie)

James Bond (Goldeneye 007)

Conker (Conker)

Rash (Battletoads)

Take your pick from the games MS actually created under MS

----------------

Kaim- Lost Odyssey

Kinect Rivals

Fable (whichever character you like...doesn't matter really)

Crackdown

Dance Central

I didnt like having too many 3rd Party characters on All Stars either.

If they kept the 3rd party characters to a minimum (or stuck to one or two 3rd party exclusives) they would have been forced to go for a few more obscure characters (like Ninty did) making the roster more interesting. PLus, like someone else said it was still mainly Sony guys.

Samus vs Pichu or Snake vs Olimar was also pretty dumb but it worked

Dude, your post makes zero sense. With that logic, Nintendo may be the only one to develop in house characters and franchises. Sony did the same thing as ms,  they got games and characters from companies like naughty dog, a company they bought. Or from companies they never owned, like insomniac. But, you knew that, right?

Microsoft actually has enough characters for that?

I mostly play PlayStation consoles, so I don't know many characters of Xbox, but. Master chief ( duh) dude from GoW, Banjo and kazoomie ( sorry for misspelling) Fable one character, Perfect Dark main character, Quantum Break main character, Steve from Mine Craft, Captain Price from CoD, Main character from Allen Wake, someone from Left 4 Dead. Main character from SunSet overdrive, and I'd what else :)

I would suggest looking up Sony's development history before making such a foolish statement. Nintendo and Sony actually have quite a few in-house made characters. Sony's is growing in IP development while Nintendo is steady with the traditional characters, but allowing monolith and third parties to make newer characters for them. If Insomniac made games on par with Sony's level of development Sony would've invited them full time into the family. They are good but they always miss the mark. They will always be a good third party for the highest bidder, but they are nowhere on par with Sony's top five devs.  Sony Santamonica, Naughty Dogs, Sucker Punch, Sony Japan (Team Ico) or Guerilla. Theres more great developers under Sony...but its sad to even compare Insomniac to those either.

With Nintendos old games with Rare, they do. Rare left with some of the best IP's Nintendo had as exclusives. Nintendo should've never let them go if they knew what was good for them.