My two Euro-cents:
First of all, Microsoft has a much lower reputation as a company in Europe than in the US. A lot of people don't like them and will only buy their products if there's no other competitive option. So their uphill battle is not just to gain a foothold in a market dominated during the last gen by Sony, but it already starts with brand reception.
Sponsoring:
So in order to boost their profile they need to step up on sponsoring. Not just smaller stuff like TV show events, but mass sports like football, F1, etc.
Plus, they should realize that Europeans aren't a homogene mass, we're all different. Advertising at a cross country skiing event will get good coverage in Norway, but will reach zero potential buyers in Greece. Better yet example, cricket would has an audience of almost zero outside UK. While this might pose a problem for transnational marketing, it's also an opportunity: You can almost specifically target certain regions where your sales are below average. For transnational marketing use the Champion's League (like Sony), the EURO or generally any big sport event like a hockey WC, etc.
Advertising:
The above applies to their advertising efforts as well. I have yet to see a single Forza Motorsport 2 advertisement during a F1 race. None! It would be the best time to reach the casuals motorsports affecionados.
As for increased advertising let me underline a single observation I made during the Christmas (sales) time. (IMO!) # minutes of Sony TV ads: # minutes of MS TV ads = 2-3:1. Sony had more than twice as many air time than MS. Plus, they had at least 4-5 different ads (partially aimed at different demographics; they might have even been smart enough to vary the # of minutes attributed to commercial A, B, etc. in different countries), while MS used the one commercial fits all approach. For the record I liked that ad, but it's not a very flexible approach, TBH. Sony could run more Uncharted commercials during TV shows with a predominantly male audience and buy airtime for PS3 Singstar during a TV show with a more female audience etc.
Lineup:
With regard to lineup I think there's distinct difference between the perceived lineup (e.g. "there're only FPS on X360") and the actual lineup. The first one can be fixed with advertisement (see the Forza2 issue above), fixing the second issue takes more time, more effort and, more importantly, more money.
Basically there are three options: Buy an exclusive deal for a third party franchise (less time consuming, but probably more expensive) or create an exclusive game yourself (more time consuming) or both.
A) Buy an exclusive title:
This should be used on paneuropean franchises like Pro Evolution Soccer (I don't think EA would take up unless a particularily large wad of money changes hands). I.e. franchise proven to do well across Europe. FYI, this isn't limited to sports titles. Anything that does well in a various countries, buy it. Moreover, don't forget to advertise those titles.
B) Create exclusive games:
First step woud be to specifically advertise games already created or in production that would do good in Europe (see Forza 2 issue above) [Just to clarify this here: advertise them at the time they hit the market].
Now the next step is far more risky:
I.) Create games aimed at local markets, like Wintersports games (Olympic, etc.) or a rugby games, etc. It's a risky strategy in the end: You'll have to spend money on a game with a reduced target audience and no garantee how much you will recuperate in sales. On the upside you could boost your sales in certain regions.
II.) Create games aimed at "other" target audiences. Sing Star, Buzz, etc. do well beyond the hardcore gamer market. Sing Star is particularly sweet deal for Sony as they own labels, themselves etc., but MS should try to put together a competitor leveraging their strengths as much as possible (including an online shop, etc.).
Other stuff:
Tapping other markets...
Don't be afraid to try some non-conventional stuff: If a market place is too PC centred, get decent M&KB in your games and don't forget to get some games usually found on PCs.
etc.
