MS was pumping out Arcade games/ budget games consistently throughout X360 era.

Yeah. That's nice and all, but it's not the same as retail-release AAA output.

Rare was re-structuring as a studio since they shipped Perfect Dark on N64. This myth of them getting mediocre after being bought by MS is a fallacy.

Regardless of the reasons, their ouput post-Nintendo is nowhere near as good as it was when they were partnered with Nintendo.

Nintendo forewent Rare stakes. If they thought Rare was good at the time they wouldn't have let them go. Especially when Rare was making games better than they did.

Yeah. And Nintendo was stupid to let Rare go. But Nintendo's actions from the early 00s don't really have any bearing on MS's first-party output.

MS Studios can concentrate on making their holy trifecta and leave 2nd party contractors do the rest. It's much more cost-effective and less time consuming.

Except that Remedy is really the only notable second-party studio partnered to them that's developing AAA titles. And by "second-party" I don't mean a third-party studio that has exclusivity rights purchased for just one of their games. I mean a real second-party, an independent studio engaged in a long-term exclusivity contract to the console maker. Dead Rising 3, Ryse, Titanfall, Sunset Overdrive, Rise of the Tomb Raider, ReCore, Scalebound, and formerly Gears of War were/are all third-party exclusives because Capcom, Crytek, EA, Insomniac, Square-Enix, Comcept, Platinum Games, and Epic never developed games exclusively for MS. Now, it's possible that a couple of those might never have been made if it weren't for MS's backing, but even if that's the case MS has been far too reliant on simply throwing money at third-party developers in order to pad their library of exclusives. Some of those games would have come out on PlayStation as well had no exclusivity deal been reached. Sony and Nintendo have their fair share of third-party exclusives as well, but they've put more emphasis on their own output to grow their library of exclusives.

Third-party exclusives simply aren't sustainable in the long run, especially in a generation like this one where the PS4 is outselling the XBO by a 5:2 ratio globally. Fewer and fewer third parties will consider it worth their while to ignore the sales potential of releasing on PS4. Even last generation it was clear that this strategy wouldn't yield a strong selection of exclusives in the long run. After 2009 the 360 had essentially been reduced to Halo, Gears, Forza, and Fable as major exclusives, with Alan Wake and Crackdown 2 thrown in for good measure. Within another year or two the situation will likely be the same for the XBO. That's why MS needs to invest more on in-house first-party development.

-MS 1st party is woefully incapacious but what about the competition's? Until Bloodborne, none of the AAA set the world on fire. Even the latter didn't sell enough to be considered a blockbuster.
-Xbox best line up ever is not what you convinently mentioned to fit you view. Let me remind you what within the next 18-20 months Xbox lineup will be approximately:

-Forza 6 and possibly Forza Horizon 3 in 2016

-Recore/Scalebound/Sea of Thieves/Quantum Break, I can tell you that none of those are Halo, Gears and Forza. All new IPs

-Halo 5, the most ambitious take on any modern FPS campaign

-Fable Legends

-ROTR

-Crackdown

How can you guys even downplay this?