I think MS made a bold gamble and were right to do so. The future will tell whether that gamble will pay off. The biggest risk is that the TV will lose its center stage to individual devices, and that few people feel the need for a central one that does everything, but excels at little.
But there is also a good chance it will be good enough at a bunch of things to pay off. I think most of the hardcore audience prefer specialist devices that excel at specific tasks. But there may be a large enough audience that wants something that works nice and easy. My wife loves her iPad, and she is a big risk - she does everything on that, watch TV etc. My son (and I) love the big screen, and we are a good opportunity. If MS can make the right games and leverage Kinect in a really cool way, that's a good in. Right now, Sony's Playroom isn't even a proper game, but more successful in capturing his attention. Microsoft needs to do more in this area. It's a long game. In three years, the system can be 299 and have a good ecosystem with games. It may be hard to beat by then, as they have a good head start.