I really don't see how a drop is ever a stupid move, though $50 is kinda lame. You can't buy a game with your savings. But it's a start. MS seems pretty determined to make some money here. They kind of remind me of one of the cashiers at work that flirts with people.
If you think about it, $350 isn't that bad. Last gen the entry point was $299 + ~$30 (memory card) to play GTA3. Sony managed to sell plenty of units at 330, so MS should be able to do the same. $100 would be great, but this isn't that bad if you put into perspective.
Edit: Was the price of a PS2 MC $35 in '01? Can't recall.
No it's a smart move. They want profitability, so $100 right now is a bit extreme. I bet $50 will have a HUGE effect on sales at least temporarily, and we'll see the other half of the Benjamin get taken off by the holidays.