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MS should just graciously accept that they'll be third (or 2nd by a very slim margin) and not kill themselves trying to beat Sony for the sake of beating Sony.

What they should do is:

1) Maintain profitability. GC may have come in 3rd, but was still very profittable for Nintendo, unlike the 2nd place Xbox. If they make a net profit this time, then they have actually accomplished something worthwhile. Moreso than beating Sony but being at a net loss.

2) Continue to broaden their base. 360 will finish somewhere between 30-60m a definate improvement over 22m for Xbox and that'll give them a better start for next gen. The 360 also has a much broader selection of games this time. It's no more the 'shooter' system than PS3 is. MS also needs to continue to reach out to casuals. No, they'll never beat the Wii here, but if they can get some degree of success the next system can build off of it.

3) Buy more studios. While PS3 has an arguably stronger line up of games coming, that's only because developers thought it would be as successful as PS2. If they knew 3 years ago the Wii would be the dominate system, FFXIII and MGS4 would have been planned for that system from the get-go. So the question is how long can Sony maintain a 'we have better (upcoming) games' lead over 360. Not long. Once those long in development games have come and gone, only Wii will be getting 3rd party exclusives. Otherwise, it'll be a stalemate for the HD consoles. Having said that, both Sony and Nintendo 1st party strength is crushing compared to MS who have very little. Getting more inhouse development would definately be an asset to MS for this gen and next.

4) Improve it's image. The RRoD has given MS (already a much maligned company) a huge black-eye in the console market. They need to really up their game and make people forget all about RRoD long before launching Xbox 720 (or whatever it's called).

5) Steal Apple's designers. One thing MS does not do is make sexy equipment, if they want to gain more casual acceptance they need to really make the Xbox720 (or a 360 slim) a visually and audibly desirable fixture in the living room.