This article is totally speculative. It is about something that Microsoft could do, should do and may well be doing. It is not about the Xbox 360 or the upcoming Xbox 720 (Phoenix?). It is about a totally new machine. A totally new sort of machine.
Firstly it is necessary to understand the concept of server based gaming. We have it already with MMOs and casual gaming on PC. With these your computer does very little work other than running the display, reading your control inputs and talking down the internet. The game itself is running in a big computer remotely sited with many hundreds or many thousands of people playing the game at the same time.
Server based gaming has grown very rapidly in the last few years, far faster than console based gaming. It offers many advantages and few disadvantages. Typically the gaming is paid for with a monthly subscription and by advertising.
The new Microsoft console will be a set top box for server based gaming. Because it will be doing so little work it will be very simple and very cheap to make. So cheap that they will be able to give it away when you take out a subscription for the service. Ot charge say $50 for it. Alternatively they may add bells and whistles such as a gesture interface and go very slightly upmarket.
To maximise the experience and mimise bandwidth requirements they will use digital compression technology between the server and the home, with a hardware decoder in the box to uncompress the incoming data.
Microsoft don’t even have to make the box themselves, they can license it out to lots of other people to make. So it could be built into into decoder and video recorder boxes as another function. There could even be no box at all with the electronics incorporated cheaply into the television itself.
And what will you get for your subscription? Firstly a service very much like Live but with server based games. These will vary from noughts and crosses to complex MMOs. And there will be lots of social networking capabilities. And they can add all sorts of other functionality such as home shopping. In fact there is no limit to the possibilities.
Now it doesn’t have to be Microsoft bringing us this. It could be Sony or Nintendo. It could be Samsung or Phillips. It could even be Google. But Microsoft seem to have the most potential and resources to carry this through. And it really fits well with their business model. 
