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TheSource said:

The 500m figure for software is for Xbox and Xbox 360 combined. The Xbox 360 would need an attach rate of over 12 games per user...and the average X360 owner only has about 8.7 games as of September 2009.

Check out the video of Ballmer's Keynote to see for yourself - he says "since the launch of the first Xbox we've sold 500 million games".

Thanks for clarifying that.