M$ is schizophrenic ... their consoles are already hurting the Windows market. Which is kind of strange, since the xbox has only ever earned them negative bucks (overall). If they ever wised up they'd make licensable fixed configuration Windows MCE PC designs for the living room with a special branding for compatible games and ditch the bloody xbox.
I think this would either create an expensive 3DO disaster or a very unevent experience.
1. Very Fixed HW: The HW manufacturers would want to make a profit on the "PC-console" which would make it DOA.
2. Allow Wiggle room in HW: Cutting corners on HW would create potential compatibility issues, if not a consistent experience. Unless you mandate certain HW as a baseline and very specific designs, in which case you pretty much have a 3DO.
On the PC space, I think the writing was on the wall before the Xbox. PC hardware is expensive. PC's have all sorts of STUPID update/driver/compatibility issues. PCs have mass piracy. PCs have competiting software avenues and no real strong incentives for the platform distributor for quality control, distribution, marketing, etc. These could have been handled differently, still could. But there is a reason everyone, not just MS, jumped ship. Valve, id, Epic, Crytek, etc.
It was pretty inevitable as consoles went HD, got hard drives, enabled robust online experiences, etc and really pushed ahead in social gaming in a way the PC never did in terms of living room experience. Consoles pretty much devoured most genres and demographics--MS only jumped in to get their share before the PC died.
Maybe they helped accelerate the demise of the PC. Then again MS now has a HUGE investment in Xbox LIVE. LIVE has a lot more potential than a lot of their initiatives in the last 5 years. It touches millions of consumers and gives MS a leg in the digital distribution world it never would have to the degree they now have without the Xbox. The Xbox also has given MS a strong position with developers, both in tools and publishing software.
So the Xbox loses money. And MS cannot maintain internal game studios.
On the other hand their $5B investment resulted in Live, connecting nearly 20M general consumers, and a huge leg up in DD. And they are making money now.
Not bad of an investment for a company looking for new avenues of investment and diversification. Sure, it doesn't make "PC gamers" happy. But that market as defined now (high end graphics, niche genres) is small and not self sustaining to the degree the console market is. Without the Xbox the future looks a lot more like Sony and Cell (move Xbox sales into the PS3 pool and the side-effect of the PS3 being the high end all inclusive machine) and the landscape for MS looks very different.
The only way for MS to have a competitive closed box in the console environment is to do what Sony and Nintendo do. Going the crap-box with multi-IHV distributing various configs with premium markups would be, well, 3DO.
And that is a disaster and doesn't do anything meaningful for MS at all.