I don't think Microsoft goes for the jugular by making the 360 into PS3 Jr. All that does is make it look worse when you start comparing things like HDD replacements, cost of playing online, and total cost. How do you expect the 360 to match up with the PS3 cost-wise when the Elite, without a Blu Ray player, costs 40 bucks more than the 40GB PS3? 80GB more of hard drive space is going to make up for that?
No, price cuts are what the 360 needs. They need to differentiate themselves from the PS3, not make people compare the two systems even more. If anything, they need people to start comparing the 360 to the Wii. They may be separate markets to a large extent, but they need people to start looking at their purchase and say, "Man, if I buy a 360 for the same price as a Wii, I get HD gaming, which will go great with this new flat screen I just bought." That's the comparison they need, if only for the reason that people won't say, "Man, if I just get this PS3, I get pretty much all the same games I get on the 360, plus a Blu Ray player."
And you know that Microsoft can't continue their drive towards being in the black if they add a Blu Ray player onto the 360 and still stay price competitive. They just can't.