Last time I checked Lost Odyssey was doing very well for a JRPG in the states?

Sony is a CE manufacturer. It's their area of expertise. It's the same reason that XBL is so advanced compared to the PSN. MS = software, Sony = hardware.

The fact that most of Sony's manufacturing is done in-house (Blu-Ray drives, etc.) whereas MS's manufacturer is almost exclusively 3rd party (BenQ disc drives, etc.) helps to keep costs down as well. This was a major problem that MS had with the Xbox. They could never drop the price siginificantly lower than it was at launch, so they were losing money on every one that they sold throughout all 4-5 years that it was on the market. It's also the reason that they stopped production immediately upon launching the 360.

Also, because Sony uses more advanced technology in the ps3, their expenses have more room to fall.  For example, DVD drives can't get much cheaper than they already are, but Blu-Ray drive costs have been dropping like made as mass production ramps up. It's estimated that Sony already cut over $400 off of the initial manufacturing costs of the ps3 because of things like this.

In Microsoft's case the loss is entirely born by the gaming side - there is no other revenue stream to make up for the loss.

In Sony's case they won the hi-def war - they are willing to take loss on every blu-ray player sold. They get a little bit of every blu-ray movie sold. The loss, if any, on the PS3 can be shared by the entertainment and licensing/movie sides. (Toshiba was selling HD-DVD players at$149. They would have made money back by selling HD-DVD movies. )

You consider resoundingly outperforming the original Xbox and selling more year over year to be crap? 

Oh well, at least you've acknowledged the advantages I was 'touting!' ;) 

Have you heard? - Vista is outselling XP and selling more year over year! It is the best!!

To answer your question, Yes, I consider resoundingly outperforming the original XBOX and selling more year over year to be crap. The market has changed. Beating your admittely poor performing and pulled-from-market prematurely console is nothing to brag about. And selling more year over year, when all your competitors have *larger* year over year increases is also nothing great. So yeah, you pretty much defined 'crap' right there!

With all these advantages, why is it dead last WW week after week? Microsoft is used to treating consumers as stupid and ramming whatever software Microsoft wants to sell down their throats. In VG consumers have a choice - something Microsoft isn't used to - and they are no longer choosing X360.

 Microsoft is attempting to put a media-center in every household, and trying to push the movie market towards downloads.  Thats the only reason they ever backed HD DVD, and it worked.  Blu-Ray player prices came down far quicker than manufacturers wanted, and studios are signing up their content to XBLM and other services in droves.