They named their current console Xbox360 instead of Xbox2 so that they could skip a number and seem like they are up to par with the PS3. That said, even though the next console is going to be the third Xbox there's no way they can call it Xbox3 and calling Xbox720 would just have people scratching their heads and wondering what happened to Xboxes 4, 5, and 6. 720 also doesn't really mean anything or have much significance as a number. It is 360 times 2, but that doesn't really mean anything that people immediately grasp.
420 works because it implies this is the 4th Xbox (even though it isn't really), and makes it seem like its in the same league as the inevitable PS4. 420 is a number that also has some meaning among certain circles and will make it seem more cool with that crowd, while at the same time it will completely go over the heads of those who don't know. Many hardcore gamers will recognize and understand the meaning.
But just in case MS wants to be politically correct, they could call it Xbox4D to somehow imply it is capable of eye popping 4D graphics that are somehow superior to 3D, even though that's impossible.
ETA: Assuming their next console has integrated Kinect support the Xbox4D would be a very marketable name for it, because they could say that it adds another dimension to gaming that actually goes beyond the TV screen and swallows up the player and their living room into that gaming world which players can interact in via the Kinect thing.
I seriously doubt MS invested all that money into Kinect just to have it be a one shot peripheral for a console late in its life. I would bet money its going to be in the next console as well and probably integrated directly into it somehow.