1. Please, please, PLEASE take the App Store model that Apple has used and apply it to Xbox Live. There is already a process by which developers have to get their wares certified to run on the Xbox so the review process is pretty much already in place. The barrier to entry on the 360 needs to be significantly lowered (there have been half-baked efforts, but nothing terribly inspiring). One of the most exciting rumors (that didn't happen) about the Apple TV was that it would be running iOS and allow for apps on a television. The Xbox 360 is in a great position to make this a reality. Let me write tiny games/apps for the 360, and let it be easier to get them on Live than it is to get on Apple's App Store.
2. The way the entire company thinks about User Interface / User Experience design is, if I may be impolite, fucked. What little I've been able to read regarding how MS goes about designing the parts of their software that people see and use comes down to this; We follow whatever Office does and middle management sanitizes everything. It's no wonder that something great like Courier died inside of Microsoft. Designing applications for humans is very, very hard. Designing applications for humans inside of a huge bureaucracy is next to impossible. There are probably people working at MS with titles like "User Advocate" and other nonsense, but the end product reflects that those people are incompetent, impotent, or both. A team of powerful, capable people need the ability to "stop the line" and say no to the bullshit. The company has coasted for far too long on UI/UX familiarity due to the pervasiveness of its products. People hate using MS software. My family hate their Windows PCs. The gloss and fresh paint of Vista/7 haven't addressed the common person's frustration. In a business environment people have an incentive to adapt to bad software and work around it. At home my mother just wants her computer to print a photo at the click of a button, at the proper resolution, with the right orientation, and exactly how she sees it on the screen. Experienced business and technical users have mentally blocked out the usability cruft of the last 20 years, but the consumer market is and will continue to be unforgiving. This is why Apple is eating your lunch.