Unsustainable because even if they're making enough profit elsewhere to cover it as a company, making a constant loss going forward is going to piss off a lot of the MS shareholders, especially those who are already very vocal about wanting the Xbox division sold off. It gets to a point where the entire division just ends up being a vanity project without a clear end goal beyond selling more than Sony, and that's not exactly a worthwhile exorcise.
I say underhanded and market manipulation because they're simply throwing money at people rather than offering a more desireable product in the first place.
They're selling the hardware they make at a loss and they're giving away free games and free Live subscriptions just in the hopes of selling more than a rival product that up until now has been a far more desirable one to the consumer. And that's not even taking into account the discounted rate they must have offered retailers for the huge volume of stock they're currently flooding the market with, that must be translating to an even greater loss than normal. If they didn't have the rest of MS's big pockets to bail them out it would be financial suicide to conduct business like this, its completely contrary to the way consumerist capitalism is meant to work, and it has no real benefits long term beyond saving face for a month or 2 and maybe, maybe getting enough customers to long term make up the losses in future purchases, but given just how big a loss they must be incurring, and the fact that they seem to be targeting bargain hunters and non-early adopters, I'd be very surprised if that panned out.
Sure, it benefits anyone getting an XO this Christmas because you save a huge amount of money, but in the end MS are just spending an absurd amount of money on the hope of getting some good publicity, and even that's not guaranteed.
Ultimately, they made an inferior, expensive, and ultimately less desirable product. They ruined their public image with blatant anticonsumer behaviour and failed to either right all those wrongs, or adequately express to the public that they'd done so with the policy changes they have made. They've been paying for those mistakes all year with lower than desired sales, and a strong competitor that's performing better. Now they're just buying their way to better sales.