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There is also the school of thought that Microsoft wants the entertainment division to take off because the PC division is stagnating. MS has initiatives to get developing nations to use Microsoft products but, as far as places like North America and Europe go, the saturation point has been reached. Microsoft can keep milking us for occassional upgrades but there's no growth opportunity.

Not to mention the long-running idea that all home technology will converge. I've always thought this was naive but if enough people at MS buy into it then having a popular product in the living room makes strategic sense.