Historically, Microsoft has been very very successful at developing software. It's track record with Windows and Microsoft Office in particular is unmatched. Even before they took the leap into gaming consoles like the Xbox, they had some success with entertainment software as well such Age of Empires, Flight Simulator, Links and Mechwarrior for the PC.
Lately though, hardware produced by Microsoft has taken a pounding in the press. The warranty for Xbox 360s has been extended to three years to address flaws in the console that were apparent to everyone else but Microsoft. As a precautionary measure, Microsoft is offering a free refit of its wireless steering wheel to address a possible overheating issue. Even the original Xbox had an issue with its power supplies, requiring replacement power cords.
These events aren't the result of a string of bad luck, they are the result of a lack of experience in the design of hardware and devices. While they can compete with Sony and Nintendo in the marketplace, both Sony and Nintendo have dozens of years of experience combined in creating devices and have not had any issues similar to what Microsoft has experienced recently.
Should Microsoft be in the hardware business? While the company has deep pockets, it can't afford any more issues with its future systems. Yes, the company needs to grow its product line but hardware may not be the best way for this company to go. We could see the Xbox division go the same direction as Sega in 2000, software developers and not console makers. Can you imagine how many units of Hal0 would be sold if it were to be made available on the PS3?