On Wednesday, Microsoft (MSFT) confirmed the worst-kept secret in the video game world: It plans to unveil its next generation console on May 21.
(Read More: Microsoft to Reveal Next-Generation Xbox on May 21 )
Like Sony's (Tokyo Stock Exchange: 6758.T-JP) PlayStation 4, the new console is expected to hit stores this holiday season and many analysts and investors are hanging their hopes on the new machines to kickstart the video game industry back into growth mode.
Microsoft has been coy about what features the new Xbox will have-and not even the most ardent rumormongers claim to know what the console will be named. But in speaking with developers who have spent time with the developer kit, a few details have emerged.
(Read More: Xbox Live Challenges Cable Box )
The new system will likely run on an AMD (AMD) processor, rather than the IBM (IBM) PowerPC technology the Xbox 360 uses. For users, this means they won't be able to play their Xbox 360 games on the new system. (Similarly, the PlayStation 4 will not be backwards compatible.) The system will also beef up its system RAM to aid developers in making games.
Kinect, the motion sensor peripheral Microsoft introduced in late 2010, will be an integral part of the new Xbox and has been dramatically upgraded. Microsoft will also continue to emphasize other forms of entertainment as much as it does games. (In 2011, Microsoft brought Nancy Tellem, former president of CBS Television Studios, on board to lead its efforts to form an Xbox studio.)
"We now have a tremendous opportunity to transform [the Xbox] into the center of all things entertainment-from games, music and fitness to news, sports, live events, television series and movies-so consumers have one destination for all their entertainment needs," Tellem said upon her hiring.
The Xbox 360 has been the top selling console in the U.S. for 27 consecutive months, according to The NPD Group-and analysts say Microsoft is the company to beat in the next generation.
The added degree of difficulty with this next generation, though, is that the leap in graphics fidelity will not be as pronounced as it has in previous new consoles. And that could mean a slower adoption rate among consumers.
"The next-generation consoles present only a modest improvement in graphics quality over current generation consoles, suggesting to us that many gamers will be slower to adopt the new technology immediately," said Michael Pachter of Wedbush Securities.
The key to success for the new Xbox, then, may lie in its non-gaming features.
"Console releases really aren't about games anymore," said John Taylor of Arcadia Investment. "They're as much about media centers, access to the Internet, social networking and the whole selection of interactive opportunities. There's a 46 million [person] audience for Xbox Live that's already familiar with the service-and Microsoft's goal should be to get that to 100 million."
This generation, Microsoft spent a lot of time, money and energy striking deals with cable and satellite providers to bring their content into the Xbox Live environment. And some believe those relationships will expand dramatically in the next generation.
There have, in fact, been some reports that Microsoft wants the new Xbox to act as an additional layer on top of the cable box- similar to Google (GOOG) TV, letting Xbox Live subscribers talk and participate in polls during shows. Pachter, in fact, expects the system to have an IPTV tuner that will allow cable operators to deliver services over the Internet outside of their regulated geographic boundaries.
"The cornerstone of the [Xbox] Live universe is still core gamers-and over the last several years Microsoft has made big strides in expanding that user base and capturing households that you wouldn't call core gaming households," Taylor said. "That has never been as important as it now. I think the investment Microsoft has been making in Live and [the decision to provide] a robust slate of network services is going to really start to pay off in this generation."
Of course, the first trick for Microsoft-or any console maker-is to get the devices in people's homes. Nintendo has largely failed to do so thus far, with life to date Wii U sales under 3.5 million-far short of the company's initial estimates of 5.5 million.
Pachter said Microsoft's ace up the sleeve could once again tie in to its relationships with cable companies.
"If we are right [in our IPTV theory]," he said, "Any of Microsoft's MSO partners will have an incentive to subsidize the purchase of the next Xbox in exchange for a long-term service commitment, similar to the cell phone model," Pachter said. "If the subsidies are steep, it is likely that the next Xbox will appear more affordable to many consumers than currently anticipated, and it may capture market share faster than many expect."
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