I've actually been thinking about that quite a bit. At first, $10 seemed a little too cheap, but I'm slowly coming round to the idea.
Microsoft wants an Xbox in every living room. They want people's lives to revolve around them. To do that, they need to get as many people as possible to buy in to the device.
What will happen is that people will buy the subsidised Xbox and they'll happily pay $10 a month without a second thought. Then, when their two years are up, they'll continue to pay the $10 a month because they'll have forgotten that it's optional/they're too lazy to cancel. Microsoft then has a subscriber paying $10 a month for a period of 5+ years.
A few years ago, I used to promote an online product using a rather innovative twist. If people bought through my affiliate link versus someone elses, I'd refund 100% of the total cost of the product after 180 days. All they had to do was email me their receipt and paypal address. Surprisingly, only 2 in 100 people would remember to email me and ask for their rebate. This was a $297 product, too, so it was hardly an inconsequential sum of money.
Consumers have really short memories. If Microsoft convinces people to pay for Xbox live for two years, they'll probably continue to pay for it for the rest of their lives.