Plus, MS had no expectations of making money off the original XBOX. It is well documented that MS expected to lose in the neighborhood of 10-16 billion over ten years when they jumped into the console business. They did so because Sony's hype of PS2 computing prowess made them think it would be a threat to Windows in the home computing arena and because PC gaming (at the time) was stagnant. After Sega folded their Dreamcast tent, their only alternative to a long (and expensive) campaign to insert themselves in the business was to buy Nintendo and that looked to cost *more* than $16B *and* risked a massive walkout of the creative staff who they feared would refuse to work for "gaijin" ownership.
And so XBOX was born.
As pointed out, it succeeded in establishing MS as a credible console player, XBOX as a cool brand, surpassing GAMECUBE in worldwide sales, and pressuring Sony into focusing more on games than home computing during the PS2 generation. The latter allowed Media Center the required incubation period to establish itself in the market.
So MS got (at a very high price) exactly what they wanted.
Not a failure.
Again, it is well documented that the primary mission for 360 is to maintain the XBOX presense in the gaming market *and* make a profit. Beyond that, MS had hopes of leading the market, especially with *developers*, and growing their market from the 5 million a year average of the original to the 10-12 million a year range. So far, the first part of the plan seems to be bearing out; the second part is running a bit behind schedule but then so is their price-cutting.
They very recently made it clear that they expect 360 to have a longer lifecycle than the original.
Which isn't to say they won't introduce a next gen product (say around 2010) as a high-end complement to the existing product, much as Sony is trying to do with PS3. Having established their new proprietary architecture with 360, there is no reason the architecture can't be extended (more cores, more RAM, dual GPUs, bigger EDRAM) into a second-gen 360 that is an extension of the current line rather than an outright replacement. So any talk of a short life for 360 is, at this point, just idle talk with no real basis in the product's actual market performance.
And, based on the product's market performance to date and the recent relaunch of the Core as the Arcade it is clear that MS has no intention of dropping the concept of a price-leader 360 without a HDD any time soon, so the form factor will continue to be determined by the sidecar HDD; same height and depth.
Unless something changes dramatically in the next two years, all we have to look forward to is price reductions and bundles as market adjustments. Even an HD DVD-equipped 360 is unlikely given the low penetration of the add-on and the low prices for the standalone players.
Basically, what we see is what we'll get, as far as hardware goes.
Now, games, that's a different story.
There's plenty of room yet for game developers to get creative now that they've gotten a handle on the technical aspects of 360 programming.
I expect some really unusual (and fun) games over the next two years on 360. And that's what we signed up for, no?