Regardless if the PS3 does indeed pass the 360 in WW sales, it is more than likely that Microsoft will end up making more profits this generation than Sony, and that the Xbox brand will definitely grow in marketshare. They've got to see that as a 'win'. I believe that the 360 will remain available for purchase after the successor is released, much like the PS2 and be very competitive against the PS3 for many years ahead.

i think a price cut, possibly bring premium to arcade price level and dump arcade or match/undercut wii with arcade

i think microsoft will put out a new system if they fall behind. but i do think they want the 360 to ast a lot longer then the xbox so mab 2010 or 2011  max till xbox 3.

as for the price drop sony will follow as microsoft sales improve. sony will not let microsoft sales beat it by not dropping the price.

I think there will be a two hundred dollar 360 by the end of this year. Microsoft has to make a move towards the low end market eventually. They have done well to hold off on that, but they should be looking towards getting into that market as soon as possible. Once there it will be a significant and profound edge in this console war. Probably not the premium, but the arcade is likely.

I don't think Microsoft is in any hurry to leap ahead again as they did with the 360. They will learn from their mistakes, and the mistakes of Sony. They will want to minimize the launch price under three hundred dollars. They will want at least a dozen solid AAA titles for the launch year. They will want better reliability, and they will want to have the assets in place to ensure that they can. That means they need to spend a significant amount of money to ensure it happens. So they will want to have as much time to profit, generate brand loyalty, and streamline their new machine rather the fix on the run. They certainly have the time so will use it.

The fact that MS launched a year early this time gives them the luxury of a 5-year-lifespan with the 360 AND launching first next time, in 2010.

Entroper - or MS can launch in 2011, save alot of cash on R&D expenses (since the R&D cycle will be much longer, thus stretching the costs over a 6 year span), and still have the X720 out years before the PS4.

Sony wants a "future proofed" Playstation to go 7 years before a succuessor launches in 2012 or 2013 - MS can deliver a much, much superior system in 2011 and wind up with a huge marketshare against the Playstation 3/4.

Merely because MS has yet again learned more about the console market, and it's shortcomings with the 360: RRODs held it back, but has realized that exclusives and strong first party sales will help continue Microsoft's erosion of Sony's control of the Core gaming market.

Exactly. It depends on what Sony and Nintendo's moves are, but Microsoft has bought themselves a window of flexibility, even if this generation didn't go as smoothly as it could have. The 360 has already shown that it can make good money, so cutting its lifespan short would not be a good idea.

I think MS will really use what they have learned this generation and come out the gate with guns blazing next gen. I've always heard their 3rd gen is the one they want to dominate.