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What makes you think that MS cares about the hardcore demographic, when their goal is to protect their other interests (Windows, Office), from a livingroom invasion?

MS cares about the whole picture. If they had to choose which portion of the console demographic to ignore (which they don't, really), it'd probably be the hardcore one, not the casual one.

MS is gearing up for an assault on Nintendo territory next gen -- they've given Sony a lot of trouble, won't go to extremes to continue that effort, when Nintendo is looming so hugely.  You said "3. Dominate the industry" -- hasn't Nintendo already proven that "hardcore gamer" does NOT equal "the industry"?