Almost every single Xbox 360 owner came face-to-face with major component defects. Initially from the manufacturer almost every single console had serious hardware problems. We can't say that Microsoft wasn't any happier than their consumers because they spent around $1.15 billion dollars for exchange and repair.
Now, Dean Takahashi from VentureBeat says, Microsoft new about the defects with Xbox 360 from the start (before the release), but didn't want to delay the release date so that competition like PlayStation 3 and Wii to jump ahead and release their consoles first. Information source is not official but the journalist is sure the data is legit. Because of the decisions Microsoft made they weren't able to progress their product further as they wanted to.
Due to bad quality Xbox 360 lost any kind of advantage over PlayStation 3 and Wii. But, recent drop in price for Xbox 360 Arcade in United States lower than Wii, will push the project a few steps further.