You can't be much more of a long term failure 6.5 years into your plan, than the Xbox brand is. They were both great game machines, but horrible business failures. I have said that their is a strong possibility of them pulling out of this trouble, however, if they don't by the end of '08 why would they continue?
Again, because you are thinking too short term. Their plan was never about 1 generation or even 2. When the XBox launched they were looking 2 decades down the road.
Again, the long term goal was to become, eventually, the home entertainment console. The collapse of WebTV left that territory uncontested, but Sony was clearly making a move for it. The goal of the Xbox was to stop Sony and grab as large a share of that pie for itself as possible.
I don't know what the specifics of MS's strategy are, but I imagine the basic steps would be:
1) Establish MS as a legitimate player in the gaming market. In this MS has succeeded. As of yet, no one believes MS will be out of gaming come the next generation.
2) Increase market share. Even MS had to realize that it would be difficult to outcompete two gaming giants in one generation. The XBox got their foot in the door, now its up to the 360 to actually get into house by taking some of Sony's market away. That will be essential for the next step:
3) Integration of home entertainment. Already starting to some degree, but not quite here yet. I doubt if it will be successfully realized even in the next generation, but I do expect the "720" to be a big step closer.
4) Become a dominant player in living room with unified home entertainment system.
At best, this will take 4 generations (starting with the XBox). If you take a console generation to be 5 years, your looking at a roughly 20 year plan.