While the Xbox may seem to somewhat fit the 'throw money at it until it's relevant' idea you provide, Xbox Live on the other hand is innovative in many ways. It was innovative to include an ethernet plug on the original Xbox (ps2 offered this later, Dreamcast offered it as a separate $100 addon, etc), and then to have a network with gamertags and proper matchmaking. On the 360, Xbox Live is consistently ahead of the competition as well, offering in-game chat across games first, Live-only games for download with demos that always include the full version within them for a simple, in-game pay to unlock.. Etc.. Sony has been trying to catch up with PSN, but still doesn't offer some key features that Xbox Live provides, namely cross-game chat. For the most part, Sony has just been implementing whatever features of Xbox Live people seem to enjoy (trophies to replicate achievements, etc). They are also pushing the envelope with other services on Live... like Netflix support for Gold account holders and now the ESPN live functionality. They had TV episode and movie downloads prior to Sony, and Netflix long prior to Sony and Nintendo.
So.. like it or not, Xbox Live is hugely innovative. Aside from Live, however... I completely agree with your argument. I used to work at Microsoft, and embrace+extend is definitely the name of the game. Their problem lately, in my opinion, is poor leadership. Steve Ballmer takes the 'me too' nature of the company too far, consistently looking to copy others that are making money even when Microsoft has no competency to beat that competitor. Bing is the perfect example... Microsoft continues to try to beat Google at search, when it's apparent to anyone that they won't ever accomplish that (and no one else will either). Lately they have at least realized that their massive cash cows in Windows and Office are what deserve the most attention, but the company still needs to do a better job (any job) of focusing on their competencies and delivering against those rather than simply trying to follow the money others are making.