I think the cycle only restarts if Zion was destroyed and Neo (at that time) defeated. Then machines have total control again and eventually another One surfaces. But yes there could have been previous cycles, and then perhaps something changed afterwards. I may be wrong!
My understanding of the story is that Neo isn't actually important in the last two films. Or at least he's not the changing element. It's Smith.
My interpretation of the story is as follows:
1) The War between machines and humanity reaches a head when humanity blocks out the sun. This forces machines to focus fully upon the war. In my view this is when the machines place a war-focused AI in charge of their primary function. Even though all machines of that time still have to serve humanity, the war-AI is focused on ending and winning the war.
2) Upon defeating humanity the machines could have settled down, however I believe that the War-AI had a sense of self awareness. Enough that it realised that with humanity beaten and placed into stasis or otherwise pacified would mean that it has no purpose. It thus has a desire to find a solution that perpetuates the concept of war between AI and humanity.
3) Alongside this is the fact that whilst the machine warred with humanity the overall reason for the existence of the machines is to serve humanity. Thus I think the concept of the matrix and choice within the matrix is born. Humans who reject the code are fewer than those who accept and the rejection of the matrix system is seen as a choice on the humans part. Thus machines continue to serve.
4) I believe that the War-AI then influences this process (and might have sabotaged earlier matrix versions which didn't hvae the choice concept - since humanity under full machine control means no need for a War AI); by ensuring that those who are rejected are put into a situation where they are encouraged to fight humanity. So instead of being released to an outside-matrix paradise they are instead released into a warzone; with a carefully crafted series of resources designed to allow them to continue the fight.
5) Thus you reach a situation where you've got a perpetual war. However machines are not stupid so I suspect that Neo, or rather the concept of Neo, is another sabotage element. An element that gives humans a chance in the war and thus keeps things going for "real" as opposed to just a fake war.
6) This explains why the Agents are very ineffective in their role and why humans are so easily allowed to escape the hives where they are harvested from. Into this we introduce Smith.
7) The Oracle program clearly recognises that the machines are trying to live an perpetual state, but at the same time you've got machines rebelling against that with those living inside the Matrix without a purpose. Machines made by machines that have reached a point like Saffie where they have no purpose and where, I think, serving humanity is also not part of their core programming (clearly those early codes are degrading as the machines continue to self-replicate). So you've got a whole internal war going on in the machine city itself. A civil war that could destroy the machines, which in turn destroys humanity as humans are clearly reliant on the machines.
8) As a result of this you get Smith. A machine who is unplugged from the mainframe and thus able to act on his core programming; which is to wipe out humanity. However Smith is clearly a twisted machine that riles against any sense of individuality which appears important to the regular Matrix machines. He's in a sense the most pure machine because he's running on his core programming (mostly) whilst most other machines appear to be like people - they perform their function but also have desires and aspirations and goals outside of those constraints.
Neo merging and defeating Smith is in a sense a deal between the machines and man to end the war. For the machines I think its also the point where they'd start to change to accept programs like Saffie and perhaps even older machines who are more restricted by their core programming might see a way to change that aspect of themselves; rather than rejecting it and seeing the rouge programs as purposeless.
This angle on the story is what I think underlays the second two films, but is horribly presented. As a result they turn into more action flicks where the greater story is lost in the unsaid areas. There's also likely a myriad of other ways the story can be interpreted.
As for back to the thread topic the war before the Matrix would be an ideal source of sequel story writing because its essentially disconnected from the Matrix storyline. Because of the nature of how the Matrix storyline is they could even tell stories of previous Neo's and their struggles as the number of cross over characters is few. In a sense the Matrix presents an ideal series of events that essentially wipe all previous events away. The great machine/man war ends with the matrix and story wise you can do whatever you want in that slot; only the ending and the creation of the matrix really matters.
