It is a valid question though it ignores one *very* important point:

Sony is still taking a loss at $600 while MS is making roughly $75 on each Pro at $400. This puts MS in the position to bleed Sony dry. Not only does MS have more money to throw at this, they're already turning a profit on each 360 sold.

Personally, I think MS should bite the bullet and put Sony down for good this generation with a $200/$300/$379 price point two weeks before the H3 launch with a transition to a 65nm chipset. They'll take a hit initially but it would completely devastate Sony for the next three years.

But, if MS gets greedy and waits for Sony to act first (most likely early 2008), they could be letting them right back into this generation.

Just imagine if, instead of releasing the Elite, MS instead announced a $100 price drop on the other two models. It would be kicking ass right now.

Yep. I just shook my head and muttered "WTF" when the Elite was announced.

Meh. 

MS is probably focusing more on getting their games division to be profitable, to show their stockholders that they can do so.

However, I doubt that they'd have a problem with losing some money if it was clear that they had to do so in order to crush Sony... The question then is, how will they decide if that's the case?

They have to crush Sony this holiday season. With H3 and GTA IV coming to the console within a month of each other, this is the perfect opportunity to deliver a killing blow to Sony.

If MS lets Sony stick around until 2008, I don't see how they can match the holy trifecta of FF, MGS, and GT. 

Why do people think Wii will die in 2009. Will Wii Sports (and games like it) finally be graphically outdated by then? As if that isnt already the case... Its not like those games will stop being fun. Plus in 2009 we will probaly get Zelda, maybe another Mario (maybe 2010). Another Metroid etc. Plus third party games should be at full stride by then. Also if the PS3 does poorly from now until 09, it doesnt matter what they do, they would never be able to come back. Besides the fact that most third parties would have left by then.

If the Wii was only selling to the usual console buyers worldwide as previous consoles did and PS3/XBOX360 are I would say Wii sales would slow down BUT it is selling to people that would not usually buy a games console as the DS is. Who knows if it will still be selling to this group and in what numbers in 2 years time.

That's a good point, the DS really hit its sales stride in the second year.  It wasn't sold out the first year like the Wii but then Nintendo was making a lot more of them initially.  We could easily see the Wii explode next year to over 2 million per month when a great library combines with excellent releases and major production increases.

I don't think the Wii is helping move either HD system. I think it's giving people an inexpensive alternative to play while they wait to get into HDTV, or put off making a decision about the 360 versus the PS3. But now that the Wii software support is taking off, I suspect a lot of those buyers won't see the need to bother with either HD system. So it's possibly hurting both systems, certainly not helping the PS3. I see the idea here -- the Wii's success could be delaying the larger "next-gen" move and buying the PS3 time to get its act together. But in the segment of the market that cares right now, the 360 hasn't exactly stalled out since the PS3 and Wii came along. It continues to outsell the PS3 and seems to be the preferred system for those who were waiting to make a decision. If the 360 is the PS3's most immediate competition, it still has a formidable global lead and the PS3 is not currently gaining on it.

Although both XBox 360 and PS3 games look great on ordinary sets as well, some people may think they really need a HDTV to notice the difference, but that's not really the case. The XBox 360 and PS3 allow for far more complex games as well, beyond just the better HD graphics, for instance better AI, bigger more complex worlds, better physics, etc. It's somewhat of a marketing problem, Sony obviously would like to push HDTV sales.

Although the Nintendo Wii is also competing with the Playstation 2 hurting its hardware sales, I think the system also helps the PS2 platform indirectly and vice versa for the long run as it may make sense to create games which can be ported between the two lower specced systems. So I think the Wii may extend the lifecspan of the PS2 with regard to games development.