If you sell it at production cost, then who is going to pay for the years of R&D that go into making the console?
That makes absolutely no business sense whatsoever! How are they going to keep shareholders happy if they are not making a profit.
Just bumping up the processor speed does not make 'BEST Gameplay', you still need 3rd party devs to come up with the game ideas in the first place. We would probably still have the same games, just with better graphics etc...
Mind you, the online gaming thing i agree with, cant believe it took this long to get an online game (not including the intenet channels..)