You might want to read through the comments I made in a couple of other threads on this topic. There is talk in the industry (I work in an affiliated field) that Microsoft is taking pretty solid hits financially on each X-Box being sold.
The story is as follows. The initial lauch price Microsoft had pencilled in was a small profit/break even price per unit (can't remember the figure). Before lauch, Sony unexpectedly dropped the PS2 price and the Gamecube launch price was less than expected. And so, the X-Box was a loss leader right from launch.
From Sony's point of view, rumour is they were able to acheive a major cost reduction in manufacturing the PS2 by combining the functions of two processors into one around the time of the X-Box launch. They dropped prices corresponding to this cost-cut a little after the X-Box launch.
Microsoft have not been able to acheive production cost cutting due to there being three manufacturers involved in making an X-Box - Intel, MS and Nvidia. Apparently they are still running pretty close to the same cost per unit they were at launch.
Anyhoo, talking to a few retailers, it appears that contrary to popular belief Sony and Nintendo are actually profitable at current console prices.
I can't remember the exact prices, but I believe the X-Box is currently losing around the profit margin of 7 to 8 games per console - which is fine, except the average number of games sold per console across the industry is 4.
Industry rumour is MS will lose between $500 million to $1 billion on the X-Box this year, with no relief in sight.
The X-Box is clearly technically superior, but unfortunately consumer electronics lives in a world where profit is king - and that is a real issue at the moment for Microsoft. They've picked a market where the major players are the most successful manufacturer/marketer of consumer electronics ever, and a wily and nimble industry veteran who has seen numerous competitors go bust.
Did you know Microsoft made what was basically a takeover offer for Nintendo in the formative stages of the X-Box? And, when the board at Nintendo saw the plans for the X-box, they thought the manufacturing would be too cumbersome to be effective...