Microsoft has monstrous cash reserves. They can throw around $8 billion for a purchase of Skype like it's candy.
I think it's a huge mistake to think MS can't take large losses.
And I don't think they view it as a "loss", they view it as a long term investment to basically secure the living room. How much do you think Microsoft would like to have control of the living before Google or Apple get there?
XBox 720 will be sold at a loss at launch, and I don't think MS really minds.
The XBox does not exist for MS because they need another division to make them profit. Whatever profit "silly video games" make for them is peanuts in their overall business scheme. The XBox is and always has been a trojan horse for them to make their move into the living room and the XBox 720 I think will be the fully realized vision of that.
I also think Epic and other third parties are pushing MS to make the system as powerful as possible, and MS tends to listen in these cases (they upped the 360 RAM basically at the urging of Epic for example). 720 will be a beast of a console, book it. It will be a 8-10 year product cycle too.
Also from the murmurs we've heard from certain developers point to the 720/PS4 being very powerful and impressive, not moderate upgrades of existing machines.
