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Not a bad theory really.

~triple the 360's power would add minimal cost in a year or so. Could still be 45nm processes if built based on same architecture, thus allowing a slim model and full backwards compatibility similar to Wii/GC.

They could launch MS Natal (keep name for neXtBox) with wireless 360 type controller and finalized form of Natal in a more slim sleek case.

Probably launch profitable at about $250-$300 w/ sizeable HDD or copy Nintendo one step further and do a sizeable flash memory (20GB) w/ ability to take any size SD card to increase.

Not a bad plan overall. Would beat Sony and Nintendo to next gen again.