Xbox Warranty To Cost $1 Billion, Customer Good Will
Microsoft might be 3% short of where they want to be, but their sell through is 400,000 units short of what they thought they would sell in fiscal year 2007. That's at least 25% short of their goal for the year (based on having 10.4m sold in 2006).
I agree that the Xbox 360 has a better portfolio of games, but your comparisons with the Wii or PS3 aren't completely accurate. I haven't seen a Wii game yet that rivaled the better games of the original Xbox, regardless of what processing power it may have. The Xbox charges for their online gaming and that the PS3 is currently 50% more than the Xbox, not twice as much as you said. (The PS3 is also rumored to drop $100 soon.)