Microsoft is a massively successful global corporation. They did not get there by being passive, or by not knowing how to win a fight. They are waging a war of attrition rather then trying to win a bar room brawl. The difference is subtle if destroying Sony in effect makes their gaming division a losing venture they have gained nothing. However if they beat Sony while showing a profit they have only accomplished every single one of their goals.

Here is an interesting thought. Microsoft can afford to charge more now bringing in more profits. Then thanks to those accumulated profits they can afford a much larger price cut in the future then Sony could afford to match. The result could be a two hundred dollar 360 next spring which would most definitely not be something Sony could come close to matching, and would most definitely put the final nail in the coffin. Further more that would force Nintendo to remain competitive. Honestly Nintendo doesn't seem to be in a position where they would need to cut prices regardless during the holiday season.

The more money Microsoft can make in the short term the more money they have to spend in the long term. Sony is actively sacrificing the long term in a effort to salvage the short term. While it might be necessary to save their console from oblivion it does mean that they have backed themselves into a proverbial corner.

Sony will not be able to hang a hat on the PS2 next year especially if Microsoft delivers a large price cut. The PS3 will still be a blood letting, and all Microsoft has to do is weather the holiday season keeping the PS3 unsuccessful enough. Capitalize on their new found profitability then use that during the spring to put the competition down for good.

There is a method to the madness. Microsoft making money is about the worst thing that can happen to Sony. Yes Microsoft is intentionally bleeding Sony, but if they use timing to their advantage they could destroy the consoles hopes for next year say when GTA launches. Could you imagine a two hundred dollar 360 being announced while Sony cannot follow suit. Such a system at such a price outside of the holidays would all but annihilate both the PS3 and the PS2.

And that's why Microsoft must fail.  Letting MS gain control of another industry is quite possibly the worst thing that could happen.

Edit:  It's what I've been saying all along, Microsoft is in this to gain control of your living room.  Nothing more.

@Andir

You need to take the prescribed dosage. You do realize that every manufacturer wants to accomplish this noble goal. Microsoft, Sony, and Nintendo want the same thing as much of your entertainment dollar as they can get. You know who controls my living room right now its a little company called Time Warner. Let me tell you something they are real good at bleeding me for every cent they can get. They control my cable, my internet access, and my phone service. Relax it cannot be all that bad right. Well yeah it can they also make movies and television series. They want to choose my movie format for me.

Honestly I damn well welcome Microsoft to bring their aggressive competition into my living room. Since I am oh so happy giving Time Warner over a hundred dollars every month. I already have a monopoly hanging over me. I could use some good old fashioned aggressive competition. Go for it Sony and you too Nintendo. We already have monopolies in the front room they are called cable companies, and dish networks.

You act like Microsoft is doing a bad thing. I need Microsoft to compete thats a wonderful way for me to get better service, at a far more reasonable price.

@Andir

I really don't see MS as much of a threat.

-Look at how many markets MS has. What is it 4? Windows, Office, Zune, XBox?

-Now look at how many markets Sony has. TVs, audio, Movies, Music, transformers, phones, robotics, video formats, etc. Heck they even own the patent for the lithium battery.

In my opinion Sony loosing the game business is good, no one company should be able to film movies, produce them, produce a soundtrack, produce a game and a system to play it it, make a TV to show it all on, make speakers to play them, and make a disc format and flash memory format to sell them on. The only company more widespread than Sony IMO is GE, and while thankfully GE is playing the nice guy, Sony is out there aggressively trying to spread into more and more markets with more and more proprietary technology.

Microsoft had two main goals this generation:

1) Stop Sony from domination (and getting control of the living room)
2) Actually making a profit

In part due to their early start and in larger part due to Nintendo, goal #1 is working even better than they could have hoped, so they are working on #2 instead.

Could they deliver a 'death blow' to Sony? I'm not convinced of that, especially since PS3 outsells 360 in all regions except NA. Dodece theory of 360 doing a large cut in the Spring (say just in time for GTAIV) would indeed put a real hurting on the PS3, but mainly only in NA and they have already won that (over PS3 anyway).

At this point I think Microsoft will focus on following Nintendo's tactics (sell consoles at a profit, attract casual gamers) and remain priced below PS3 but not by much.

Sony doesnt have many markets in reality over Microsoft. If you look at Europe this week, now that the "surge" from the price cut (which is normal)is comming back down, they are only 14k apart. Thats a virtual dead heat. If Microsoft prices the 2 systems significantly different, than they will also get a surge and Sony cant match it. Remember, Microsoft only had 1 minor one in 2 years, and Sony had 2 massive ones along with incredible bundles and the usual 5 free blue rays.

"Look at how many markets MS has. What is it 4? Windows, Office, Zune, XBox?"

I dont think Microsoft is one of the largest corporations in the world from only have a meisly 4 markets.

I don't think Sony is going to turn a profit on PS3 hardware until a combination of the following happen:

1) Blu-ray becomes a standard format
2) Another year passes without any price drops
3) MGS4 and FFXIII release causing surges of PS3 sales which better manufacturing costs
4) They cut out more features
5) They finish cleaning out excess stock

The PS3 may not even help blue ray become the format. DVD is not even near dead. how many units would Sony have to sell of the PS3? Look at the PSP. Almost 30 million sold and yet they still cant move UMD movies to save their life. You need hundreds and hundreds of millions of units sold to make a dent. Dvd was in everything and it was the official standard and it still took 10 years to take off.

 how about, they cut manufacturing cost.. 65nm CELL and RSX = a huge chunk of cost cut. It would also go into a smaller power supply, The blu-ray drive should be getting cheaper to produce, HDD costs are lowering. There are many factors. Sony will be even on costs within the next year. Thats how even the highest end tech works. As time goes on the cheaper something gets to produce as it has paid for the equipment used to make itself.