They knew about the problem before they released the console. They released it anyway as they had to be the first next gen console on the market. As previous statistics show the first console to come out sells the best.
Yes the old models did fail constantly. All free and fixed by MS.
Playstation 1 & 2 have had there share of problems too not nearly at this scale.
Playstation 3 also suffers from over heating on components. Again not nearly on the scale of the 360.
When the 360 does go toast provided you bought it within the 3 years send it of to MS for free (so it should). Thats 1 week MAX without your precious console. I cant see how that should be enough to deter someone from the cheapest console with the biggest selection of exclusive games, best visual & performing multi platform games, best online gaming etc etc.
It has happened to me three times before. I bought it when it was launched here and had two 3 RROD on that console. One was a few months ago, they gave me a brand new one that wont fail.