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Its oversized because they wanted it to be the only thing sitting in the living room.

Think back to their early marketing campaign. They were selling the XB1 as a one stop, do everything for you living room entertainment device. So naturally they'd want a design that would dominate the living room surface (as stupid as that sounds, I can see Microsoft thing along those bullshit lines).

I also assume that's why they designed it to look like one of those atrocious DVD/VCR combo machines from back in the day.