We all know the Xbox business of Microsoft is not profitable, so here's a suggestion slightly "after the fact":

Microsoft should focus on making Windows and PCs the optimal gaming platform by integrated game server, pinging, marketplace etc support, and possibly even sponsoring nVidia and AMD to make the best possible 3D chips and related software.

Benefits:

• It focuses the investments on a platform that is very profitable for Microsoft.
• It's a competitive step to take versus Apple.
• It makes it more worthwhile for consumers to buy powerful PCs, which will benefit Dell, HP, Asus and all the other PC manufacturers as well as the chip makers, and secondarily Microsoft as well.

This of course requires that PC manufacturers are willing to make media center and gaming oriented PCs. Those bulky desktops we are used to won't do. Not even laptops are interesting for this application. Rather the PC should be a small timid box (a la Mac mini), with all the features needed to connect to HDTVs etc: 1080p, HDMI, 5.1+ accelerated audio, advanced 3D support etc.

Makes sense?