Microsoft are in a tough spot (as far as Xbox hardware goes at least). PlayStation is selling much better on the console side, and Valve with the Steam install base has a good shot at making a non-Windows OS a serious platform for gaming.

Their hand was forced in the end. They have to consolidate PC and Xbox users to compete.

The idea of a machine with a locked down mode that can boot legacy Xbox titles and probably run competitive games with very little chance for cheating is interesting. But given Microsoft's track record with consumer devices I await to be convinced.

Valve should be worried if they do turn out something good, maybe this will mean the Steam machines are pushed more aggressively price wise. We can hope...