Yeah, $399 is entirely viable as a launch price at this point; people will pay that to the tune of 3-6 million units upfront and probably continue to buy it at least at moderately decent rates throughout the first year.
The issue is really that a $399 system needs to actually cost $399 to make and be designed with quick price drops in mind. They need to at least be planning a $299 pricedrop within the first year, with a roadmap that's chopping an additional $100 off the manufacturing price every year. Without that, they'll be right back in the situation from this generation where the price is killing them at retail while their excessive manufacturing costs keep them from dropping said price.
I don't see how this is necessary.
How much are the PS3 and 360 selling for right now?
I see a $399 system launching in late 2012 with a goal of 10 Million first year units and growing each and every year after that. Microsoft can certainly sell 10 million units in the first year at $399 if there is compelling content. From then on $50 yearly price cuts or a $100 price cut for the 2014 holidays down to $299 is feasible.
Of course it all depends on Microsoft's strategy, for example
2012
Next XBOX Launch $399
2013 a. $399 b. price cut to $349
2014 $299
2015 a. $299 b. price cut to $249
2016 a. $199 b. added value $249 or new peripheral ala Kinect $299
2017 a. $199 b. added value/peripheral up to $299
2018
Successor to Next XBOX Launch a. $149 b. peripheral/added value $199
It's about the value proposition, not the ticket price. Consumers will buy the system if they believe the price is right. Similar to the 3DS, people who say the price was the problem are as correct as those who say it wasn't the problem. The reason is they are coming from different angles in their argument. $249 would not have been a problem had the features in the 3DS been up to scratch (online features, more 3D content, high quality killer app style software) and people saw a reason to buy one for the price. On the other hand, the value wasn't there so the price was not appropriate.
I think we'll see a situation where Sony and Microsoft will launch at around $399 and try to add value through firmware updates, bundling and peripherals in a similar way to this generation to preserve the higher price points for as long as possible and drop down to $149 - $199 by the time their next systems are launching.