Microsoft is already competing in price (they are now officially lower), but I know what you mean. Not that they will at any time in the near future, but should they feel threatened they could easily drop the price by at least 50% and likely still make a bit of profit.
Also when it comes to VC games. They already own the rights to the game, and it's already made. They take a screenshot or two, write up a description, and toss it onto a server. Easy million or two.







