Toshiba isn't about to drop the ball on a format war that will cost them billions, and I don't think Microsoft will either. Toshiba wants the market confused so that either HD DVD owns a piece of the HD market, or that nobody buys in and keeps buying DVDs which they get significant royalties from annually.
Microsoft wants the market confused long enough for HDDL to become the norm. If people skip the next generation of disc based optical hardware, and instead wait it out a bit longer, then the download market will be ripe for their taking. "Hey look! Don't buy even more hardware, your solution is right there on your desktop and has a name.... Vista!"
No, I think Toshiba is willing to subsidize players, if they aren't already, to try to maintain or increase market share.
It should be noted, that at CES, Toshiba put up a slide that did NOT include PS3 consoles, which indicated that the current stand alone player sales belonged 49% to HD DVD, and 51% to Blu-ray. This is a significant slide, especially from Toshiba, as it indicates that despite rock bottom pricing, they still have not actually managed to outsell the competition even with a huge number of the competitors using PS3 and not stand alone units.
Toshiba isn't stupid, they likely know that HD DVD isn't going to get much further here. But, for them, there must be some other piece that they gain by continuing to fight this format war that they began.