Over the short term they are will get away with this. The opinion of all the game magazines I read is that MS intentionally set the production levels for this Christmas lower then what they know they can sell. That is, they are intentionally creating a production shortfall for the first few months. This makes them look good, since they can harp about not being able to meet demand, while at the same time letting play hardball when setting up terms with retailers.

Personally, I think the big challenge for MS is not this Christmas. The amount of money they have thrown into this insures that they will look good unless the whole things is an utter flop. Most of the XBoxs this year will go to the 'have to buy every console' markets and the 'more money then sense' markets. It's next Christmas season, when the initial buzz has worn off and the more reserved buyers are going to look at how many good games XBox has vs. what MS is charging and what other consoles are doing.