This is one of those articles which look fine on the surface, but dig a bit deeper and the substance is very thin.
If Sony didn't delay the Playstation 3, the situation would have been a whole lot different. Sony's high-definition video game system would have outsold the Xbox 360 (even with the higher price tag) based on hype alone.
Coulda shoulda woulda... I don't see Microsoft worrying too much about hypothetical scenarios which didn't happen.
However, Sony has more than one video game system. The PSP is selling solidly while the Playstation 2 is maintaining a steady pace. Therefore, Sony actually has a bigger market share than Microsoft.
The PS2 is not selling at a steady pace. In fact it's declining very fast now, about 50% down year-over-year.
The PSP is decreasing as well, but in this regard ("gaming industry as a whole"), if anything Microsoft is afraid of Nintendo, not Sony. Nintendo dominates both the handheld and the console market right now.
With more third-party opting to release multiplatform games, exclusive games on the Xbox 360 and Playstation 3 may ultimately determined the battle between the two high-definition systems. With less fire power, Microsoft should definitely be concern about Sony.
Sony's first party franchises are (with rare exceptions like Gran Turismo) nowhere near as important as third-party franchises like GTA, FF and RE. I think that's why Microsoft went after those instead of pursuing lots of first-party content. It seems to be working out just fine for Microsoft too.
Finally, Xbox Live paid subscriptions are one of the biggest revenue streams on the Xbox 360. The Playstation 3 offers free online play over the Playstation Network. Since the differences between the two networks are superficial, Microsoft should fear for their pockets if the Playstation 3 ever caught up to the Xbox 360 in sales. Not only will they lose market share but they will also lose out on extra revenue since many people will rather pay online for free than pay for it.
I don't know if this is really true... Last I heard, more than half of the existing Xbox Live accounts were paid accounts, which makes it hard to believe that many people mind paying for online as compared to buying a PS3 to play online.
This is perhaps the most valid point in the article, but it's something that Microsoft can change if they need to. However it doesn't seem like it will cause trouble to MS for the foreseeable future.