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flagship said:
Good points, especially about focus on keeping user base and expansion beyond games.

Although I think running higher resolution HD and making the next xbox a true sequel rather than a MKII are necessities, systems not only have to compete with each other but with the ever improving PC as well. The problem with a Mark II system is that it not only limits graphics but also processing power. Compare a mark 2 system to the PCs that will be available in the later days of its life span and it's like comparing a SNES to a PS2, slap as big a graphics card and as much RAM as you want in a SNES it's still going to get its ass kicked because the CPU is incredibly inferior. The end result of this is that most of your hardcore audience will have jumped ship for the PC, not just because the games look graphically better but because processor capabilities will have limited the SNES further (difficulties in running 3D engines, storage space issues of carts verse DVDs, number of enemies on screen, AI of enemies, lack of destructible terrain, etc.)

Now I'm not saying that a Mark II system (GC to Wii) can't be fun but it certainly limits programing options. Dead Rising is the classic example, 360 version can run a hundred zombies on screen, the Wii version thus far is at a dozen. Over the next couple years these issues are going to become more and more apparent and while casuals probably won't care all that much they aren't buying a whole lot of games either.

Your points are valid. Microsoft will need to figure out what the most important thing for its customers and its business. For Microsoft there is a clear interest to maintain its existing base and not to start all over again in the new gen. Microsoft is not keen on starting to lose money again on the introduction of new and expensive hardware and it must not risk the revenue stream from royalties and subscriptions.

There are some nice HW upgrades that are easy to add to the Mark II without causing disruption. For example - an imporved graphics engine that allows drawing more poligons/sec on the screen could make for a better gaming experience with higher res/fps on Mark II but still allowing the old 360 to run the same title well.

Other HW upgrade are more challenging: Adding more gaming processors and more memory will break the forward compatibility proposition.

There could be a compromise though - the extra processing power and memory could be in the box available for non-gaming functionalities (e.g. DVR, Streaming, VR/3D) and have them enabled for gaming (through firmware upgrade) 2-3 years down the rode when the Mark II installed base is large enough and the 360 installed base had started moving to the Mark II on its own. This would surely be controvertail.
 



Prediction made on 11/1/2008:

Q4 2008: 27M xbox LTD, 20M PS3 LTD . 2009 sales: 11M xbox,  9M PS3