The Xbox 360 is a juggernaut that Sony never expected - or I should say, Xbox Live is. Xbox Live became the premiere example of how multiplayer gaming in the 21^st century should be – easy, fun, and something for everyone. Whether you want to play a quick game of chess with your friend across the globe, video chat, or watch the latest high-def movie releases, Xbox 360 and Xbox Live have you covered.

Sony’s PS3? Eh, not so much. Sony underestimated the power of social gaming and services, and have been playing catch-up ever since launch. That being said, they indeed are catching up, albeit slowly. I doubt that Sony will ever be able to reproduce the fluidity and completeness of Xbox Live, the core architecture of Sony’s online services is too lacking without major successive revisions and overhauls. But that being said, the PS3’s online interactivity will offer enough for most gamers, and this threatens to cut away some market share from Microsoft.

PS3’s biggest strength that has kept it alive is Blu-Ray. Microsoft was smart in choosing time-to-market rather than deciding which high-def format to back, but their hastiness has also cost them. The red rings of death that too many rev. 1 Xbox 360s have contracted have generated enough bad press to keep people who might be on the fence about a next-gen console sitting tight… on the fence. I don’t think the red rings have driven people to Sony, but I do think it has kept cautious consumers at bay. Meanwhile the PS3 begins to look a little more attractive as time goes on… It’s only a matter of time before the PS3 vs. Xbox 360 decision becomes a little tougher to make. Microsoft needs to act now to drive home the fact that the Xbox 360 is the premier gaming and entertainment platform for your living room and that the PS3’s current perception as a niche gaming machine and cheap Blu-Ray player stays that way.

So with that, here is what Microsoft needs to do to win over this potentially large customer base:

1)      Make Xbox Live free.

Making Xbox Live free will effectively steal any thunder that PS3’s online service has going for it. With each revision of the Xbox Live marketplace, more and more advertising spots and special applications are being added that should more than allow Microsoft to subsidize the Xbox Live service. As for me personally, I think $50 is cheap for the level of service I obtain with Xbox Live. It is a revolutionary service, and having a platform that finally unifies the way people play games online into one solid offering is more than worth the price tag. But for people on the fence, the casual gamer, or those who just want to use the 360 to rent movies, $50 is a tough pill to swallow. Make it free, and they will come.

2)      Keep the 3 year warranty, and advertise the HECK out of it.

Subsequent hardware revisions of the Xbox 360 have introduced additional heat pipes/sinks and lower voltage cores that have done wonders for the reliability of the machine. The problem is the perceived reliability has barely moved at all in a favorable direction. Even if it is a limited warranty that is only good for the red ring of death, it doesn’t matter. Advertise that 3 year warranty like crazy. Put a GIANT sticker on each Xbox 360’s packaging that tells grandma it’s ok to buy this new-fangled machine for her grandson. She will sleep easier at night knowing her hard earned money won’t disappear after 90 days.

If Microsoft enacts these two policies, they will all but silence the main two arguments against having an Xbox 360. Free multiplayer and premium services for all, and a warranty that puts trust into their relationship with gamers - nothing is better than that, and it’s a win-win for everybody but Sony.