M$ fully researched the gaming market and did exactly what they were supposed to do....
When you enter a gaming market your first system will undobtedly "fail" in profit terms. The key is to get the system out there, wrangle as many exclusive liscensing deals as possible, offer superior hardware and services, and eventually drive the competiton out of business. The xbox will fail.... xbox 2, however, will dominate the market.
So far m$ is right on target with this.... virtually every third party game recently available on the ps2 is now available on the xbox. M$ also now has rare as well, which means all of the third party "nintendo" games will only be on the box. With the impending buy out of capcom, it looks like m$ might also have exclusive rights to horror survival and classic fighter games. Combine this with the fact that the xbox is the only system to have a decent online framework and it's pretty much the system to get, although the ps2 will still out sell it simply because it's been in the market longer and consumers fear change. (they are stupid that way)
So when the next systems come out m$ will have superior hardware, a strong, exclusive, game base, an estabished online network that is actually still useable in a few years (narrow band is dying, deal with it) capcom, rare, and m$ games.
All ps2 will have is squaresoft, which is impressive, but still nothing special.
So although m$ is loosing a ton of money now, in 5 -10 years it will be m$ vs nintendo with sony out in left field.
This is how m$ works, they use thier infinate wealth to dominate any market they enter. And this is why they have been able to give us the best gaming platform ever.

Btw about the dvd issue.... according to polls at least, most gamers build their own machine. These gamers often leave out the dvd drive as they are techies and have a home theater system (like me.)
Until the cd rom is completely obsolete games will always be on cd(s). It's just like when games were on floppys long after the cdrom came on the market. It got to one point where you needed 30+ floppys to install a single game.
(or windows 95 ;-) )
Let's hope it doesn't get to that.
Btw if they have decided to include the same amount of levels then the game is super short or the pc version has far worse graphics. You can't fit a 6 gig game on a 700mb disc, so something's up.