I like the analysis, but "no online Metroid" was not an announcement, as it's been known for months.

I don't think you really understand Microsoft's strategy. They want to position the Xbox as the control center to your living room -- they have expected to take a significant hit for this to happen, but they're looking at possibilities down the road. Digital delivery is where it's at, and Microsoft is using Xbox live Marketplace as the tip of the spear for this movement. They see how Apple revolutionized the music industry with iTunes and they're hoping to be the leader for that technology involving games, movies and television shows.

This strategy seems to be working, too. The Marketplace is growing tremendously fast and they're having a lot of success with it. 

Besides that business strategy, Microsoft was expecting this to be a three console race to tear away marketshare from Sony. They're already doing that and this is only the second console. They'll see their investment through to the end, and they'll likely reap the rewards from it. I think Xbox 360 will still see losses through the end of this console's life, but probably not at the level people are expecting. I think a 1-2 billion loss in total when the machine is finished with its lifespan is likely. And I think their total loss for this generation will actually be slightly less than Sony's. By the time the 720 or whatever it will be called comes out, Microsoft will likely be well in the black again.

Investing at a large loss for several years is quite painful for any investor. They've definitely got their financial analysts working to lessen the blow as much as they can, and without question put the billion dollar loss for this quarter to help make 2008 profitable, since they would make shareholders happy. (Not sure if it works for American taxes, in Canada you'd need to demonstrate actually losing the money rather than saying you will, but less taxes on other profitable divisions with a 40% tax rate does make it only a 60% loss rather than 100%)

But investing at a loss for years is very dangerous. If I invest 1 million for 1% (So 100 million capitalization) for a loss of 20 million, 15 million, 10 million, break even, then gain of 5 million, my 5 year investment has net me a loss of ... 400,000 dollars. If I had just banked that money, at 3% interest for 5 years.. I'd have gained 160,000 dollars. For a total net wasted income of 560k. Investors do look at opportunity cost. They hope that the consoles will take off as shown that they can, but with multiple year losses, you really really do not make the people enabling your investment happy. They are playing a risky game with other people's money right now. At least the Warranty and application gives some good will and gives them a chance to deliver.

Yeah everyone is making their negative announcements now just before E3: no metroid online, no smash bros. demo, new warranty because the system is so badly made that it needs one...

This is good news for 360 owners, but for MS as a company it's bad news. Also, you are assuming everyone already believed the huge hardware failure rates of the 360, most people either didn't know or didn't believe it until now.

All quite true. I think this move actually cuts off some of the investor anxiety, however. The entertainment division was already going to be posting a loss in July -- tacking on the 1 billion cost to that loss exacerbates it quite a bit, but the general tone is still, "This is the beginning of the console lifecycle and we were expecting to operate at a loss". By removing that bill from the 2008 statements preemptively, Microsoft will most likely post a profit now, instead of having another year where it seems like the division is sieving money.

The actual numbers aren't necessarily different, but the tone of the numbers is -- it's a positive gain now instead of continued losses. It's much easier to sell that to investors.

Also, it's probably the best time for Microsoft as a whole to eat this cost -- the changeover to Vista will swell the coffers for this fiscal year and will make other losses easier to swallow.

Microsoft, 3 years ago, gave away $32 billion directly to shareholders ($3/share dividend). There are no "people" enabling their gaming investment. They get profit from their operating system sector, and redistribute it as they see fit.

Precisely. E3 is supposed to be about hyping the future of the console, not apologizing for past mistakes. While the new warranty is technically good news, it is also de facto confirmation that a large percentage of the systems are shoddy. That's not going to make for a good byline.