If I were MS I'd buy Apple's designers out from under them, have them make a sexy, looking console with intuitive controls.
Have it be small, light coloured, and quiet.
Sell if for not more than $299 at launch and not at a loss, even if it means conceding technical superiority to Sony (the most powerful system has never won anyway).
Rip Apple TV for it.
And change the brand from Xbox to something more mainstream like XXX box, or Fun box, or imedia.
Hmmmm.... my name must be Steve Jobs.
If I were Sony I'd forget about graphic superiority, and make a system developers want to develop on (easy!) and people want to play on (fun)
heavy use of internet/downloadable stuff
intuitive controls
perhaps explore 3d vertual reality gameplay
Focus half the 1st party stuff on mass market the other half on core
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