InBlack, do you know how many products are sold at a loss? Printers (as they make money on the ink and toner cartridges), razors (non-electric, as they make money on the blades), cell phones (the ones where they make you buy a contract),etc. Grocery stores often sell Coke and other items below cost to draw customers in and hope they'll buy something else that's more profitable. It's called Loss Leaders and it's part of capitalism.
Also, don't blame the Xbox for moving some gamers away from the PC. Some people prefer the living room experience and ease of use that consoles provide.