1.) This is a good idea because this late in the generation, they aren't likely to attract many new hardware buyers (who weren't going to buy the system anyway) with new games, as they already have content for the vast majority of target demographics that their device is applicable to. As such, trying to sell the system as a set top box is their best option to increase sales, and also gives the Xbox 360 a renewed purpose after the Xbox 3 comes out and most of the major games start migrating off of it. Since the Xbox 360 has such a strong line up of game support even with a relatively small amount of first party titles, there is no fear of the brand not being strongly associated with playing video games in addition to being a great multimedia device.
2.) This is a bad idea because there are still untapped demographics such as (insert example here) that they could very feasibly attract to the Xbox 360 with the right content. Also, demand for set top boxes is more limited than focusing on these new demographics, and ultimately, they want people to associate the Xbox brand with games as they have to try and sell a new Xbox primarily as a games console starting at the end of 2013. If people view the Xbox brand as a multimedia brand instead, they may be more inclined to buy one of the competing systems they associate more with having a robust selection of games.