Some things to ponder.

Current hardware lineup
Arcade $279
Pro 20GB $349
Elite 120GB $449

Price of HDD
Checking newegg. Laptop 20GB hdd cannot be found. Only 40GB hdd is $6 more than a $60GB hdd. So a 20GB hdd is propably at least $10 more than 60GB hdd. MS manufacturing ranout of 20GB hdd and it is stupid to pay more for less capacity. So they want to start producing the 60GB 360's.

Possible situation
So they have probably 300K or more 20GB pro models sitting on store shelves and in distribution warehouses.  Since you (MS) plans on introducing a more cost effective HDD (60GB) how do you do this without annoying consumers who purchased the less cost effective HDD (20GB) just a month before.

Microsoft solution
Announce new price for 20GB while supplies last at the same time you announce 60GB at the existing price point. 

Thoughts
This will increase the demand for 20GB and reduce demand for Arcade and Elite.  This isnt a real problem though because it is temporary and neither of those sku's have the cost ineffective 20GB HDD in them. MS may very well plan on dropping all prices later on, but if you announce new price for the 3 SKU's being offered in the fall then what is the clearance price for 20GB?  No matter what it is going to be pretty close to arcade and has to be around $50 cheaper than 60GB.

Then in October timeframe the jasper lineup comes out for all SKU's at new lower prices perhaps. Either lower prices or more profit or more features.

How would you have done it differently?

First off I would fire the person who decided to upgrade the console to just 60gig

Secondly, I would of fired the person who decided to only do one $50 price drop in over three years

Thirdly, I would of fired the person who suggested to replace the 20 gig with a 60gig and sell it at the same price

Fourthly, I would run the Xbox division single handedly and have the biggest turn around in gaming history!!

Argghhh!!

Question: Do they still make the elite? With the HDDVD drive and all that?

Basically what gebx said and....

Still no built in Wi-Fi?!? Rubbish!

What we dont know at this time is will the Jasper motherboard include onboard Wi-Fi.

Do people think that MS should have just dropped the price of the 20GB along with the Arcade and Elite now and then in a month replace the 20GB with the 60GB at the same price? Would that have cleared out the 20GB units?

They want the 20GB units gone before any other adjustments are made. At this time of year the vast majority of units available are the 20GB units. So they want to move them in preparation for Jasper motherboard and they dont want to purchase any more 20GB HDD's either because they cost more than the 60GB HDD's.