If the rumors outlined in the Ars article are true, there will be nothing to subsidize -- the console manuf are going for the Nintendo model after having their asses fed to them for 5 years while Nintendo turned a profit on 2-year old tech from launch.

It makes the most sense for Microsoft to go the compatibility-route a la Apple and iOS -- Apple proves it works, Middleware companies will love it (Crytek, Unreal, Unigen) and gamers won't need to skip a beat.