This is basically my say on it.

This makes the second time in a row that I go in without validating what I was told, but in the past, weren't the games themselves how the money was made. Sell the console for slightly less, then sell games for slightly more.

That is what some guy from Electronics Boutique told me years ago, anyway.

There is also the size of the games themselves that come into play. Don't ask me how programming and producing games work; I will probably never know. I do know, however, that XBox games are priced as such partially due to the size of the games. Production is probably the cause. My guess is that the larger the developing team, the higher the cost.

Edit: Yami beat me to it.

Who are these people? I would like to meet them.