Microsoft's big trump card in terms of competing with Nintendo and especially Sony is Xbox Live. In 2008, in order to combat Sony's recently improving luck, Microsoft will have to make some drastic improvements to their online service, so as to remind people that they still have something special that nobody else has.
The two basic ways of accomplishing this are introducing a host of massive improvements and making online play free. The latter really needs to happen this year, and not even primarily because Sony lets their gamers play for free.
No, the real reason why online gaming on Xbox Live needs to become gratis is the one segment of the gaming populace that Microsoft still doesn't seem to be able to snag: the casuals. The thing with online gaming is that it has become completely commoditized. Even simple little flash games offer leaderboards, gamer profiles, and sometimes actual online play. Then you have even more fleshed out online efforts like EA's Battlefield Heroes. Most (non-MMO) PC games have had free online multiplayer components for years. And, of course, both Sony and Nintendo allow free online play on both their home consoles and portables.
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