They were willing to eat billions in losses for the 360, and I don't think they EVER saw profit on the original Xbox. I fully expect the Xbox One to get the same treatment. It's their biggest non-PC related product by a mile, and they desperately want to expand their reach beyond that space via the living room.
MS (and by MS I mean Ballmer, who's no longer around) was willing to sink money into the first two Xbox consoles because they saw it as necessary in order to secure the market (at least in the US, which is quite obviously the only market they truly care about). The 360 secured the market, and the XB1 was to be the grand unveiling of what the Xbox brand was supposed to be all along: A do-anything set box that was the centerpiece of everyone's living room.
Amazing how they went from Hero to Zero in the span of a few months/