And just to be clear here. The other one is HD-DVD vs Blu-Ray, right? Because Sony making the PS3 a BD player singlehandedly turned that from a fight BR was going to easily lose to one where they easily won. And yeah, it made Sony billions, though those billions were counted under a different division's header.I personally don't think they misread the market. They were fighting multiple battles at the time and used the PS3 as a Trojan horse to attempt to kill 2 birds with one stone.
Anyways, for all of its flaws, Sony made a few key decisions during the PS3's life that made it a winner in the end. They are as follows:
1) PSN was launched with the system as a "good enough" version of XBL, and was free to boot. This was a small miracle since they put it together over the course of half a year when they realized exactly how much of a gamechanger the 360 version of Live was.
2) The hard drive. I made a little hay above about Microsoft removing it in the cheap60 but PS3 included it in all models and this ended up being key in letting the system compete against Xbox on performance later down the road.
3) They maintained traditional game development, either through internal studios or funding third parties, while MS went all in on Kinnect. Obviously they blew some cash on Move and Wonderbook but it paled in comparison to the years Xbox spent focused entirely on Kinnect.
4) They made some smart moves with IP during the generation. Uncharted, specifically, really saved their bacon in years 2 and 3 and became, to many people, the face of the console. While Sony might have entered the generation fairly weak in regards to the makeup of its core group of studios (lots of platformers, racing games and, though we did not know it yet, a star team at Japan Studio that was going to end up sitting out the generation entirely while trying to get their giant dog AI to work properly) they all pivoted neatly into the trends of the time and came out looking a lot better for it while the opposite happened in Redmond.
5) Not much of a "decision" so to say, but their global presence specifically in Asia couldn't be breached by Microsoft. At the time they Microsoft actually did "okay" enough in Europe, even outside of the UK, but got absolutely trounced in the smaller markets that had remained loyal to PS2 era Sony dominance and, of course, in Japan where Microsoft's efforts ended up being more for developer relations' sake rather than a successful market push. Remove Japan from the equation and I think Xbox actually edges Playstation in sales that gen, but in reality you can't just delete a market because one side did exceptionally badly in it.