The logistics are like this.
Xbox has a chip in it that doesnt play nicely with other chips. Scraping knees on the playground kinda thing.
The owner of the chip kinda had MS by the balls.
Nothing happened for sometime.
eventually some agreement was reached , MS gained rights to redesign the chip to play nicely. At this point MS admits publicly there is an issue , and begins efforts to warranty the effected units , up to three times the normal warranty duration, free.
At this point MS is in a very bad place with countless brand spanking new units with the faulty chip already inside. Countless warranty repairs/replacements.
I think their choice to send out the stock they had to stores as demos is truly the lesser of evils.
I worked at frys during the time they came to an agreement. I watched the entire stock of xbox sell out , and not be replenished untill stock was zero. The first new shipment, I bought an elite. dam near 600$. I never had a problem to date.
Yes it really sucks.... but dont think MS didnt learn a lesson here.
A bigger complaint of mine, is the lack luster job they did with the format war. HD DVD vs Blueray. If they were going to just roll over and take it like that they should have caved earlier and picked up the hardware.