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I think what you are seeing here is a bit of a different mentality towards pricing. It's like cellphone pricing..  Is 600 dollars too much for a cellphone??  Sure but if everybody is buying them at the subsidized price on contract how relevant is it?  I think Microsoft sees no need to sell a system at a loss if they are providing a very consumer friendly price on contract price. There may be a niche market of people who simply would rather just buy it out right and know that the can cancel their xbox live at any time they want and might be willing to pay the full 500 for the system. In fact I might be that person because I only buy consoles to play exclusives when they release and go long peroids where I don't touch a specific console. But most people will be fine with paying for xbox live for the required 3 or so years.