While it may well flop, this seems like a very credible challenge to Microsoft's dominance in gaming. Given a very specific subset of hardware like a steam box will represent, linux can run flawlessly and offer great performance. Valve can throw together tremendous functionality very cheaply by bundling existing applications like XBMC or VLC, not to mention WINE. As with linux in general, many of WINE's configuration problems and glitches go away when you start thinking about a very specific subset of hardware.
The question is, how does Microsoft respond to it? Do they start looking to pursue intellectual property claims against WINE, or against Valve for using it? (or is this the very reason that Valve is pushing for native ports of games?) What else can Microsoft to to put the brakes on Valve?