In regards to the "are they losing money selling the systems?" arguments:
Let's remember that Sony, Nintendo, and especially Microsoft are companies with incredibly deep pockets. Let's say that Microsoft is losing $100 on every console they sell, and they are going to sell 5 million Xboxes this year. So they would lose $500 million on those transactions.
$500 million is pretty much pocket change for Microsoft. This is a company with assets of over $100 billion. Bill Gates is worth nearly $100 billion by himself.
In the meantime, they would be making a ton of money selling games for the XBox (surely recouping all losses), and they are gaining valuable marketshare and "mindshare" in what had previously been a closed market. Microsoft is looking five and ten years down the road, when the integrated set-top box will be much more powerful and come closer to the technology convergence that we have been hearing about for so long. (One box for all entertainment needs.) If they have to lose money now to get a strong foothold in that incredibly lucrative business model down the road, it is a small price to pay.