I think $400 is a bit much...and the system has been out for a year, I think a lot of people are conditioned to expect a price drop by now.
I think it's possible to sell a lot more systems at $400 than Microsoft has, but I think the console needs more big-name games...the biggest games for the system are all brand-new IPs that many gamers know nothing about: Gears of War, Dead Rising, Lost Planet. They are supposed to be good, but how does Joe Casual know that?
If the system had names like Resident Evil, Final Fantasy, Metal Gear Solid, Grand Theft Auto etc., I think it would be selling better. It'll get some of those eventually, but right now I think it's hard for a lot of uninformed consumers to drop $400. I'm a little surprised they aren't out there picking up the $300 unit, but maybe the importance of the harddrive is more widely known than I assume.