DMeisterJ about what u said on the Arcade sku,
Yes, it is cheaper, Yes some people buy it (20% of the Xmas sales maybe)
But there is 1 BIG problem : The Wii
Generally, people getting the Xbox360 are hardcore gamer more than casual. They want Premium or even Elite model. It is why the short supply has reduced the NPD sales number for the Xbox360 in NA. And just look at the Xbox360 line-up past/present and even future : HARDCORE everywhere and massively online. (except Banjo/viva pinata maybe).
At the opposite, the cheap Wii is proposing massively casual title like Wiift/wiisport and some hardcore/casual title like SMG or Brawl (for casual, party game offline KILL multiplayer online title)
MS is facing a target problem (mass PC hardcore game which dont attract casual consumers) and a BIG competitor problem (Wii, + PS3 for the hardcore crowd ...)
Since MS exclusive games primarly come from the PC world, and since the Wii bubble is not about to burst soon, the trend is not going to change.
Note : the PS3 will face the same problem when it will become cheaper (next price drop ?) but it has some strong exclusive console title (famous IP like GT or FF) and the "playsation" brand (that is knew by casual that bought the PS2) that will allow the PS3 to fight better vs the Wii compared to the Xbox360.
Last hope for MS ? ==> GTA4 + price drop
Time to Work !
