How Sony could have destroyed the 360 and remained profitable

[Reasonable]

I don't think the PS2 would have held off the 360 quite that well - although it would have slowed sales more than PS3, I agree with that.

360 was destined I think to get PC orientated online titles and would have nonetheless got strong sales in US/UK in line with that.

My view with hindsight is that Sony made 2 mistakes:

1 - they wrote of Nintendo (so did MS too I'm sure) and didn't consider them or their new console direction a threat

2 - they overexagerated the threat for the 360 and focused on matching it for specifications, online, etc. seeing MS as their real foe this gen

These led to 3 mistakes pertaining to their direction with the PS3, particularly at launch:

1 - they pushed in too much tech making the price far too high at launch (I know the price was actually good for what you got, but what you got was more than most people wanted then)

2 - they overly focused on mature titles and new IP to so so instead of getting some core franchises out early

3 - they felt sure they could use the success of PS3 to boost BR and never thought BR would in fact, for the first 2 years, actually be an anchor on the console due to the high cost it added to the console

I'd also say that they seriously over-committed to R&D around the Cell and the PS3 architecture in terms of real world benefits.