Bullet100000 hit the nail on the head. It is a successful strategy they used when launching windows back in their early years of set up.
They pushed Windows onto almost every Pc in a production line so the consumer would have no need to pay for it. Later, once all the users were accustomed to Windows and their packages, they started charging for add ons and having constant OP being released every so often.
The video game industry is huge and the fact that MS is losing out on the MPS Audio to Apple, Apple having taken nice chunks from their HW PC market, Google having dominated the Internet, MS is looking at new ways of making money.
They might be breaking even or make a little loss on the 360 with the price cuts, but just say they shift 80million 360 LTD due to their low price, that would mean they would have 80million more customers that are potential subscribers to XBL, purchasers of a HDD, purchasers of WiFi, other MS products and royalties from games!
This way, not only will they make up for what they may lose out on HW sales but they will surely make huge profits, not to forget have a much larger user base ready for the next Xbox.
Once the PS3 has manufacturing costs down, they too will have a price drop. Possibly next year since the PS2 offered a slim down cheaper version around the 3 year mark of its life cycle.
The gamble MS are taking is huge, but they pay off if it goes successful will be even bigger.