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I don't think that Microsoft is aiming for a niche HD market in gaming. Their goal is market leader in the console business and offer things beyond gaming OS OFFICE and Online services/shops. They will of course focus on gaming otherwise their console won't sell.

I believe that Microsoft and also Sony will say "OK Nintendo you were right last gen, but we also have motion controls in our new consoles and of course multimedia functionality".

HD + Motion isn't a win because it will be standard next gen. Microsoft will be stupid if they don' t see this new standard. Focussing on High-end graphics and releasing LIPS and SCENE IT kinda games won't work. Otherwise Sony would be king with Singstar and Buzz.