Was it worth it for Microsoft, though? Their entertainment unit made 32 million dollars in profit last quarter – a quarter which they considered an immense success. With that kind of income, the project will never break even, never mind turn an overall profit. Even if you consider intangibles like strengthening the Windows platform, it's hard for me to believe that those billions were best invested into Xbox.

That is irrelevant.

You can use a monopoly to get monopolies in other markets. You go into those other markets and take losses, until all others have quitted.

Then, when you have another monopoly, you can earn back the money. It might not have worked so well in the hardware games consoles.

Actually, what you describe is illegal in most developed countries. Microsoft knows this better than anyone. They've been strung up for "bundling" and "predatory pricing" many times. Also, their position in their "monopoly" markets are weakening by the day.