Nobody said MS didn't have any good engineers. They were fine with the SoC, the software, and Kinect2. I think they did an amazing job on Kinect2 and I expressed as much in the Kinect2 thread.
But... XB1 have a huge motherboard, a big mess of glue logic, insane brute force array of caps under the SoC (is it because the VRM layout didn't go as planned? Just add caps until it works), simplistic airflow with a top exhaust which is exactly what a PC enthusiast would do, the external PS didn't even help the form factor. It's like each design decision was made by a different person, with different goals. The picture showing hundreds of enclosure "ideas" hints they had no coherence between design, engineering, and integration.
Back on topic, just looking at the motherboards (wiiu, ps4, xb1): It's obvious they need a significant amount of redesign if they want to make it smaller, they have no room to make it significantly smaller than the PS4 even if the PS4 keeps it's internal PS and it's ODD. So the ODD is the last of their problem. Width and Depth are limited by the motherboard. Height is limited by the PC-style heat management.