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As far as I know, MS still needs to make about another $4B before they recoup their investment in the XBox, so financially I'm not sure it's paid off yet. However they have done significant damage to Sony, which they may consider worth the cost

Yup, and while you can fault them for investing in phone operating systems and two aborted attempts at a phone os, arguably both of these represent the real threat to the MS cash cow.

It's execution (and fear of killing the cash cow), not market selection that's the problem.

"they don't like resting on their laurels"

You mean like IE6? They actually dismantled that team and didn't do anything till competition heated up many years later.