ROM in this context is firmware, or more specifically the phone's firmware that carries the OS.

To be honest, it's a little strange that MS decided to enter the hardware market with the XBox. I wouldn't be surprised to find that they'd prefer for someone else to start taking the however many hundred dollar loss on the individual consoles.

They tried that. It was called the Dreamcast (I suck at getting a tags to work on /., so http://en.wikipedia.org/wiki/Dreamcast#Technology) . Just from that overview, it sound like they wanted more control over the hardware and the software, thus was born the Xbox.