However, if you look over in Cupertino, you see a company with a foothold in home media that made money while grabbing their foothold. Therefore, I wonder if what we have is mediocre execution of a bad plan to grab a good market?

That sounds spot on to me. But that's the game MS plays - they throw money at problems for years until they get it right. I'm not saying its the best strategy, and certainly not the most efficient, but in this case I think they're achieving what they set out to do.

Further, I'd question whether "option C" (the Apple strategy of making money while establishing the foothold) is available to Microsoft. They're not known for that kind of innovation and precision, they're more like a wrecking ball that sometimes gets aimed in the right direction.