Prior to this week's rumors, I thought MS was going to do the following:
Release a $399 system in 2013 that has a $499 high-end SKU, both of which breaks even or makes a small profit. The system itself is anywhere from 10-15x the 360.
However, the following strategy, which is what I can piece together from all the recent rumors, might be the safest investment for MS:
Release a $299 Kinect 2 System in Fall of 2012 to compete with the Wii-U. The system is 6-8x more powerful than the 360, and can play newest 360 games in 1080p 60fps. It breaks even on release or sells for a small profit.
Wait until the next major advancement in semiconductor technology, i.e. 3d ICs etc before putting out the true Xbox successor in 2014+. If Sony makes a push for a monster PS4, then react quickly. On the other hand, if it looks like disruptive technology such as Onlive, mobile, etc gains steam, cancel the project.
MS might have gone for the first option originally, but the Wii-U, contrarily to what Mark Rein said, might be making MS worried. I would not be surprised to see the Kinect 2 system at E3, running a forward compatible version of Halo 4.
To Microsoft, releasing a loss leader like 360 by itself is too risky. One mishap like RROD or $599 again, and the brand might be done for. Even without mishaps, they're susceptible to outside paradigm shifts. An unprofitable system that's becoming more and more irrelevant and outdated is the worst nightmare of all the big three.
Having said all that, I will gladly eat crow if all the recent rumors are MS FUD, and that the next Xbox and PS4 are unprecedented beasts (100 PR TERAFLOPS!) .