1) MS is paying attention to the PS3. That's why they focused so much on their current line up at E3. They realize that now is their last, best chance to bury Sony for good this generation. Come holiday '08, all 3 consoles should have decent lineups, and the PS3's price should be in a more competitive place.
2) The 360 also has an awesome lineup of games, many of which are PS3 "exclusives". While I wouldn't agree that they have the best holiday lineup ever (PS2 2001 has that IMO), Halo+GTA alone is an incredible combination.
3) The MP games like Assassin's Creed, CoD4, and GTA4 would normally be a push, but when the 360 costs substantially less, and developers are optimizing the games on the 360 hardware first, and MS is willing to pay for exclusive content, don't expect as-yet-undeclared gamers to break evenly between the two systems.
4) My wife pretty much said the same thing about the FPS - when we were watching the Sony press conference.
5) MS helped itself a lot with the 3 year warrantee. Sony shot itself in the foot with the leaked 60gig cancellation (which might not have pissed anyone off had they been upfront with it from the start).
6) Expect a MS price drop by the time Halo3 launches. Don't expect any PS3 console to be under $500.
In short, MS is worried, but they are not just standing pat.
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