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Seems like a desperate gambit to me... they want to win over the market while losing money, in preparation for their 3rd gen console... this is no longer about winning this gen, but a preparation for the next one.

-This may steal some of Sony's sales, but not much and not for long.

-If by making making the Arcade so cheap they are trying to compete with the Wii they are dumb - the Wii is too hyped, popular, and liked to even take a dent.