Microsoft isn't in this business for the games, or even to compete directly. What they want is to eliminate or mitigate competion with the Windows-based PC, from the livingroom.
They won't drop out next gen, and they won't try to tackle the high-end again. They want the Wii's marketshare -- because the Wiimote is too dang close to being a mouse for their comfort, especially when coupled with a USB keyboard. Consoles are nothing more than personal computers -- prepackaged and non-modular, unlike PCs, but the average user could care less about PC modularity.
Microsoft knows where the competition is, in the future, and its not from Linux. They will copy the leader (right now: Nintendo, and the family market), and make sure that the Microsoft option is always present and influencial.
Sony will have the most powerful console in the next gen, because their business plan aims toward the high-end gamer and electronics user/owner, not OS conquest.