You miss the point of a monopoly -- Microsoft is able to eat losses to take over markets as long as they have a safe cash cow.
Then, the monopolist have a new "owned" area to milk money out of, for taking over the next application type.
The result is that in the process of getting a monopoly of something, there is lots of development. Then, the developers/money is being sunk elsewhere and the development speed in the monopoly areas are really low.
That is why you haven't seen any revolutionary changes in e.g. office products for quite a few years. Which we all lose by, since productivity isn't increased.
(Or maybe there just haven't been any new possible ideas in writing documents? Hardly. Computer linguistics hasn't been standing still the last decade.)
The problem is that unless the 360 can make up for the losses of the first XBox, they are still losers. They'll either need that to happen or they'll need to continue profitability with their 3rd console.
It's easy to say that MS has taken over the "gamer" market but we thought the same thing when Sony dominated with the PS and PS2. It's clearly a market whose leader can be taken down: The rise and fall of Sega. The rise and fall and rise of Nintendo. Sony and Microsoft coming out of nowhere to take over.
My point was that Microsoft only need to up the investment speed enough that everyone are in the red.
The non-monopolists will have to give up in the end. Then the monopolist can stay and earn lots of money for generation n, n+1, n+2, ...
(I think this is a classic example in economy, but for bakeries (?). A big chain goes into a geographic area and undercuts the prices of the small bakeries. After a while they close. Then the prices are raised to higher than ever before -- to pay for undercutting prices in the next area.)
There are two things working against that idea: 1) monopolies are illegal in most countries that you'd be targeting and 2) achieving monopolies in most markets is difficult.
In your bakers analogy, the barrier to entry is low enough that other bakers could set up shop and create competition. The video game console market is large enough that there will always be some company that could pounce on an opportunity. In fact, it's happened twice in recent history. Sony with the PS1 and Microsoft with the XBox.
1) Uhm, hello... Microsoft pays their fines and laughs all the way to the bank -- or use regulatory capture. (How many years has the EU been trying to get usable documentation for network standards?!)
2) Uhm, hello... Microsoft and different application areas? History contradicts you here, too.
(Then, I don't know enough about Sony/PS1, but Microsoft entering areas like this is a bit outside of their normal behavior, but open source will change their home market.)
Then, the monopolist have a new "owned" area to milk money out of, for taking over the next application type.
The result is that in the process of getting a monopoly of something, there is lots of development. Then, the developers/money is being sunk elsewhere and the development speed in the monopoly areas are really low.
That is why you haven't seen any revolutionary changes in e.g. office products for quite a few years. Which we all lose by, since productivity isn't increased.
(Or maybe there just haven't been any new possible ideas in writing documents? Hardly. Computer linguistics hasn't been standing still the last decade.)
Edit: Clarity.