If users base their selection of OS on these devices on elegance, XP will not stand a chance against modern Linux, especially not the XP scaled down version that Microsoft keep alive for a bit longer.

Application compatibility might work, but that would probably require Microsft to develop scaled down versions of e.g. MS-Office to make that work.

But the hardest thing for them to overcome is that they are competing against a free, and very customizable system.