It's true. The RadioShack (NYSE:RSH) circular that was making its way around the Internet last month -- the one pitching the Xbox 360 entry-level Arcade at $199 -- wasn't a case of somebody's digitally manipulated wishful thinking. Microsoft (NASDAQ:MSFT) is dramatically cutting the prices for its gaming consoles, just in time for the crucial holiday shopping season.

I'm sorry. Did I call the 360 a gaming device? Let's read the opening paragraph from last night's release. Together.

Imagine if friends and families had the ability to instantly watch movies from Netflix, live out their musical fantasies through Rock Band 2 (Harmonix/MTV Games) and Lips (iNiS Corp./Microsoft Game Studios), star in their own Hollywood classics with You're in the Movies, or have the power to never miss the latest episode of Heroes -- all from one device, starting at $199. That device is Xbox 360, and Microsoft Corp. today announced it will offer the gaming and entertainment console, which offers the leading Xbox LIVE service, at a new low price in the United States.

It's no accident that Microsoft kicks off its press release by pointing out the home-theater benefits of the 360, such as the ability for active Netflix (NASDAQ:NFLX) subscribers to stream a growing number of the site's rentals at no additional cost through the 360, and to pay for TV-show and movie downloads. Instead of iconic shoot-'em-ups such as Halo or even the company's deal for exclusive episodic installments for Take-Two Interactive's (NASDAQ:TTWO) Grand Theft Auto IV, the family-friendly titles that get mentioned are music games and movie-maker simulations.

The Xbox 360 isn't just a gaming device, apparently. It's a home-entertainment gadget that takes on the likes of TiVo (NASDAQ:TIVO) or Apple's (NASDAQ:AAPL) Apple TV. At $199 for the bare-bones version -- and $299 or $399 for beefed-up incarnations -- Microsoft is pricing itself aggressively to compete against the Wii and PS3, but also against the other home-theater gadgetry that may tempt buyers over the holidays.

Microsoft can afford to mark its boxes down so cheaply because it knows it will make up the difference in software sales, digital downloads, and in-game advertising. A one-dimensional DVD maker or a non-TiVo DVR manufacturer can't compete with Microsoft's many revenue streams.

The holidays just got a little more interesting.

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Microsoft is a Motley Fool Inside Value recommendation. Take-Two Interactive Software is a Motley Fool Rule Breakers selection. Netflix and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz is a fan of all three consoles but finds himself spending way too much time with the family on the Wii. He owns no shares in any of the companies mentioned in this story, save for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, always there to make sure that Fools don't overheat.