Wedbush Morgan analyst/foghorn Michael Pachter seems to think it's a sound move on Microsoft's part to do so. Citing that their current price point advantage is no longer managing to keep Microsoft's sales ahead of Sony, both in Europe and the US, as opposed to when there was a $200 difference between consoles. Coupled with other factors like MGS4 exclusivity and Blu-Ray conquering the format war he thinks that it may be time for the big M to take things up a notch. And by "up", I mean "down".
An interesting point Pachter makes is the suggestion that it's unlikely Microsoft would reduce the price of the Arcade and Elite models. Instead, he suggests that they might take advantage of cheaper hard drives to create a new SKU with a larger capacity disk and simply shunt the 120 Gb model down to being the mid-range option.
The war might heat up a bit now, but does the prospect of a larger hard drive really entice any of you who don't already own a 360 to pick one up now?