2010 most likely but don't rule out a 4 year cycle. One must consider the possibility of extending the 360 technology into 720 in contrast to 360 being a completely different design from xbox. This will allow devs to get up to speed much faster and ease their transition as well as lower the costs for R&D (assuming ATI/AMD will still be in the graphics business come 2009
). This same ease of transition exists for Sony as well of course but this scenario is heavily in MS's favor as ps3 is geared for profits later in it's life. If MS shoots for and makes XMAS 2009 with 720 and we assume ps3 can also hit a four year cycle and comes out a year later we have to examine the likely console landscape in that timeframe:
2009
ps3 likely just now selling for $200.
360 likely has been selling for $200 (or less) for 2 years now.
These price structures should indicate that MS at this point would either be equal to ps3 or very close to equal in marketshare.
By releasing the 720 at this point would shift focus from 360/ps3 gen onto next gen and again they would have the jump on the competition but unlike the 360/ps3 gen, they will have the momentum significantly on their side.
While I don't think this scenario would put Sony out of business or out of the console/playstation business, it would almost guarantee the 720/ps4 gen would be lead by MS.
How that would affect profits etc is almost impossible to call but along the lines of marathon/sprint this would seem to be the logical method to gain significant profitability in the long run. Also if they are able to hit the $200 price point next year (likely) they could hold that same pricepoint until they release 720. Hence giving them significant profitability on each box sold come 2009 and likely still by that time 360 would be selling for cheaper than ps3 (not comparing feature to feature I know).
My thoughts anyway.