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This puts more fire to the rumors of MS developing a streaming gaming service like OnLive. The cheaper version could basically be just like the mini-OnLive console and stream all new games to your TV, with support for Kinect and controllers. The Xbox 360 could also have an update to allow this OnLive-like streaming functionality, making them in a sense "forward compatible".

Then the other model would be the full blown 500GB HDD, Blu Ray, 6 Core CPU, new GPU, 4GB or more of RAM powerhouse for playing games locally.

I agree with the streaming model as an option for most single player games, but not for multiplayer. Adding another layer of latency to the multiplayer experience is not a good idea.