Microsoft is building an Xbox set-top box. Multiple sources familiar with Redmond's plans have confirmed to The Verge that the company plans to introduce a low-cost alternative to its Xbox console, designed to provide access to core entertainment services. The move will allow Microsoft to further increase its presence in the living room, providing consumers with a choice between a set-top box or a full next-generation Xbox console.

We're told that the set-top box is part of a two-SKU strategy for Microsoft's next-generation of Xbox hardware that will be unveiled in 2013, with a release date ahead of the holiday shopping season. The device will run on the core components of Windows 8 and support casual gaming titles rather than full Xbox games typically found on a dedicated console. Although hardware specifications aren't fully locked down, we understand Microsoft will use a chipset to enable an "always on" device that boots quickly and resumes to provide near-instant access to TV and entertainment services.

Microsoft's Xbox set-top box work is said to be part of a broader effort to ensure its core architecture for the next-generation Xbox is scalable enough to be put together to run on a number of devices. We understand that the company could opt to combine its core system for the next Xbox with a phone stack to deliver a phone capable of running a full version of Microsoft's Xbox Live services. It has also investigated providing this functionality to TV OEMs, who could include the core services as part of a licensed Xbox television set.

We reached out to Microsoft for comment on its Xbox set-top box plans and the company issued the following statement:

"Xbox 360 has found new ways to extend the console lifecycle by introducing controller-free experiences with Kinect and re-inventing the console with a new dashboard and new entertainment content partnerships. We are always thinking about what is next for our platform and how to continue to defy the lifecycle convention."

Source: http://www.theverge.com/2012/11/21/3674802/xbox-tv-set-top-box-casual-gaming-streaming-2013

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I'm interested in what this will mean for their subscription model. Will they separate Xbox Live into media and gaming subscriptions? Will this improve the pricing situation and customizability of Xbox Live services so you won't be paying for stuff you don't use? I guess we'll have to wait in see. I'd love to have a $20-$30 annual gaming subscription as I don't use or need any of the media related stuff. Most of the content isn't available in Canada anyways.

No. As I said many months ago... MSony will have entertainment smart TV boxes... not "gaming consoles". They will of course still play games with all the same feature set etc, but they will have equal importance and focus on smartTV style features and so on.

Even Nintendo is doing this with its WiiU, miiverse/browser/nintendotvii and like many other applications to follow as it will take them longer to build it up as WiiU is just now at the point where MSony were with PS360.

It'll be more like two skus... aka "entertainment" and "pro" versions with slightly different layouts.

i.e. same box/same raw power, but one with a remote  or kinect1 and other with a gaming controller and kinect2... different storage options... etc.

Plans to introduce a low-cost alternative to its Xbox console
The device will run on the core components of Windows 8 and support casual gaming titles rather than full Xbox games typically found on a dedicated console.
We understand Microsoft will use a chipset to enable an "always on" device that boots quickly and resumes to provide near-instant access to TV and entertainment services.

Doesn't sound like they'll have the same power.
I'm not sure what this split will mean for so called 'hardcore' games. Another nail in the coffin for AA games? Casual games to sell on all devices and only the biggest AAA games left for the 'hardcore'?

No. One of them will be cheap, and low power. Probably won't have a disc drive either.

The point of the set-top box SKU is entertainment and media apps, not full-blown games. That's what the "Pro" version is for. I'm assuming the set-top box version won't be sold in stores, only through cable companies.

Many people don't want/need another set top box, so there is no point in including the technology inside the "pro" version. Would be stupid to force technology on people, it's always good to give people options.