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You raised lots of good points here.

"Not for me. If I was a stockholder, I would be very interested in Microsoft's business model for the Xbox2, and if it didn't satisfy me"

This is the way I see it.
Microsoft biggest sources of revenue today are desktop Windows and Microsoft Office, with servers rapidly catching up
Trouble is, desktop Windows and Office are never really going to grow that fast any more. Microosft already has most of those markets and they are matur markets.
With revenues around $40 Billion, Microsoft needed to get into a big high growth business to be able to continue to grow well.
With the vid games business has worldwide is projected to have revenues of $56 Billion by 2008 (http://www.indystar.com/articles/4/209613-8534-223.html ),its the right business for Microsoft to be in.

#1, Microsoft is using an amended for of Windows for the XBOX, so they don't have to write a new OS for it.

#2 Microsoft is using a verion of Direct X from Windows for the graphics of the XBOX.

# 3, when Microsoft started with Windows , back in 1983 I think, it took nearly 7 years till 1990 before Windows really took off.
Microsoft made huge losses developing Windows all those years, with little or no sales.

#4, point 3 also applies to Microsoft Word and Excel. In fact Microsoft had to do an entire re-write of excel.
Today both Windows and office generate huge revenues and profits.

#5, Microsoft already caused Sega to leave the console business.
I think Nintendo may be forced to concentrate on their hand held consoles sooner or later, or be marginalized in the desktop console business, leaving the spoils to Microsoft and Sony, whose market shares and profits will go up accordingly.

#6, I think XBOX Live is going to be big and provide a source of recurrent revenue for Microsoft.

# 7, when XBOX 2 comes out (probably late this year), its going to be a much closer fight with Sony's PS2 whenever that comes out.
Expect XBOX 2 to get into the black much sooner than this current XBOX.

Compared to Windows, Windows NT and other current big revenue Microsoft products, the XBOX has made a profit remarkably quickly and can only grow from strength to strength.
It was always better for Microsoft to use its huge profits and cash reserves to take losses and enter into a high growth business, than just sit back and count the money and watch their growth slow to nothing.

In the interest of brevity, I won't quote, but just reply to each point:

1) That's fine, but it really has no impact on new console games. Consoles have used proprietary APIs and OSes for 2 decades and grew fine. Microsoft using its own OS in its own console really isn't worthy of much mention or consideration.

2) Actually, developers include whichever version of DirectX they programmed with on the game disc itself, rather than coding for a static version of DirectX in the XBox's firmware. Good move by Microsoft--but PS3 is using OpenGL, nullifying that advantage.

3,4) The console market is completely different. Microsoft doesn't make the hardware, and has to deal with outside contractors for that. More parties leads to less overall profits. Sony has an advantage because it's a gigantic consumer electronics company--they spent $2 billion on the R&D for the PS2 alone. Microsoft is a software company.

5) Sony caused Sega to leave the console business, not Microsoft. Microsoft licensed WindowsCE for the Dreamcast's OS--if anything, they had an interest in the console succeeding. In addition, Microsoft didn't enter the console market until the Dreamcast had already died. It wasn't market anticipation of the Xbox that caused faultering Dreamcast sales.

6) It could very well be, but Microsoft needs to tweak its business model regarding the service. EA refused to participate in Xbox Live because of Microsoft's royalty and licensing models. Now when you play an EA game over Xbox Live, you're actually using Xbox Live as a middleman between you and EA's servers, not Microsoft's. I'm sure Square would love to bring Final Fantasy XI to the Xbox, but Microsoft wouldn't cave for their PlayOnline service the way they did for EA's. This has to change.

7) Xbox2 is slated for the Christmas season of 2005, or so the rumors go. However, it's not the PS2 Microsoft is competing against: it's the PS3. Microsoft will find themselves in Sega's position back when they launched the Dreamcast: they'll be the first to market with a good console, but Sony will have mindshare, and their newest console will launch a few months after Microsoft's. Nintendo is showing off their new console, code-named Revolution, at E3, and Sony's rumored to have a PS3 presentation set for E3 as well. This will not be easy for Microsoft. If they revise their business model, Xbox2 could indeed be profitable. However, it's going to take software, not hardware, to truly make money off the Xbox2--and that's the Xbox's biggest failure, a lack of quality titles.

You have to stop looking at the videogame market as an extension of the software market. It's nothing of the sort. Microsoft is a software company that's found itself in the position of a hardware vendor. Microsoft obviously approached the gaming market the same way they did the operating system market (example: their Xbox Live royalty structure) and they got burned. It's going to take more than new hardware to win the console wars.

#1, Microsoft is using an amended for of Windows for the XBOX, so they don't have to write a new OS for it.

That comment brings up a point that affects your later predictions of Nintendo's console demise. AFAIK, there is no version of Windows for any of IBM's chips, but all three next-gen consoles will be running them. Nintendo's already on an IBM POWER-based platform, but Sony and Microsoft have to create a software system to run on these new IBM chips.

# 3, when Microsoft started with Windows , back in 1983 I think, it took nearly 7 years till 1990 before Windows really took off.

That was simply because Windows was completely unusable until 3.0. I used Windows 286 for a while, but went back to a regular DOS shell task switcher because Windows brought the computer to its knees while giving me no real extra functionality. At the time, my 8MHz Atari ST could blow away a Windows 286 installation in performance and usability.

Microsoft took such a loss on the XBox by design. They were new to the market so were willing to take a huge loss leader to break into it. Unlike Windows, the XBox was actually a very capable, competitive system from the beginning. Although not as stable or well-designed as the competition, it provided an approximately equal gaming experience.