I think it's still too early to count Microsoft out of the race just yet. They have a decent number of units in the market right now, and are holding their own in the short-term (although in all fairness, the XBox was released significantly earlier than either the Wii or the PS3). We'll have to wait at least until the next generation before we can get a real clear feeling as to how viable the XBox is going to be in the long run.
Still, I'm not sure MS really has the 'killer IPs' necessary for long-term XBox growth. I mean, the biggest XBox exclusive game franchise right now is easily 'Halo', which is entering its third incarnation. Gears of War is also pretty popular. The issue is that most of the XBox's most prominent IPs are first-person shooters, and this doesn't really look like it's going to change very much: look at the failure of 'Kameo', and the dearth of RPGs. The success of the XBox up to this point is, I feel, predominantly due to Halo (which was an extremely well-received game) and XBox Live (which is a well-received online service). The XBox Live type of online service is really most useful for action games such as FPSes (like Halo 2 and Gears), after all.
The XBox isn't popular in Japan because Japanese gamers don't seem to be as infatuated with FPS games as American gamers, and because of the dearth of the genres that the Japanese market has traditionally favored (such as name-brand RPGs and stuff). Right now, the XBox has kind of been 'pigeonholed' as the console for the American gamer who likes shooting stuff up and perhaps playing sports games. While there's nothing inherently wrong with that, it doesn't really leave much room for growth. There are only so many consumers who are willing to play FPSes, car racing games, and sports simulators. Unless they can break out of that rut, there's really not that much hope for them taking over the industry, let alone becoming a perennial market leader. I mean, yes, the XBox is a media center, but it's primarily a gaming machine, has been promoted as such, and exists in the public consciousness as such. I doubt a significant number of people are going to buy XBoxes because they want to watch HD-DVD movies or surf the web on their TVs- unless MS realigns the public perception of the XBox as primarily a media center (a move fraught with risks and ill-advised in its own right), people are going to buy XBoxes for the games, and the media center functionality is going to remain strictly ancillary.