Exactly my thinking TC.

Wii = A repackaged Gamecube bundled with a new controller and sold for $250

Xbox Xlim = A redesigned Xbox 360 bundled with a new controller and sold for $150/250

The Xbox and Xbox 360 use a Microsoft proprietary API. Since everything passes through the Microsoft API they can be sure they can offer consistant results that the software expects even with different hardware in use. In addition they can cause the hardware to react in a different way to the same program and without any extra input from the developer. So they could push out a different result, like for instance they could take Halo 3 and turn it into a 3D game without the game engine itself noticing any difference because they control the API and hardware and dictate to some extent how programs are to be written.

You would not need different assets to render a game engine which was 720P on the Xbox 360 to 3D 1080P on the Xbox Natal (resolution changes need a little developer input so only future titles) and both Xbox 360 and Xbox Natal users would be experiencing the exact same content but rendered in a slightly different way.

Microsoft is an iterative company, they don't tend to make sweeping changes to their product lineup. Updated hardware is a cautious first step towards 3D and to full HD output without the risk of a full blooded new architecture. The closer the hardware is in performance and architecture between hard generations (Xbox 1 -> 360 being different architectures) the easier it is to support both. Windows Vista would be Xbox 360, Windows 7 would be Xbox Natal and incorporate both forward thinking and full backwards compatibility.

Yeah, that could work. 

The 360 userbase is displeased?

hmm.. but wait.. so your suggesting that the Natal camera will have a GPU/CPU making the hardware different AND have just natal games?

if that is true Natal IS a new console.. no matter how you put it its basically a add-on to make it a new console..

Does that mean that Project Natal is nothing more than two 360s duct-taped together? (Sorry I could not resist the cheap shot).

Seriously, this is not a new console -- it is an add-on, akin to the Sega CD or the Wii Balance Board.
It may extend the life of the console by a short period. But it is a Wii like revolution with backward compatibility but rather an evolutionary step in the history of the console.

Mike from Morgantown

He is saying that the 360 will get a hardware upgrade when Natal launches.

One way MS could fix the disc problem is to go the PC route. Compress all the games into a zip or executable file that you install to the hard drive. Once you start installing, the file expands into several gig's of info on the hard drive, which the game will play off of then.

The only big problem facing this is the overpriced hard drives on the market for the 360. If MS adopted this idea, the vast majority of games would require installation, and if they're massive in the amount of storage, then that could eat up the hard drives capacity, forcing users to go out and shell out another $100 for just 60GB of space. Plus all the arcade users, like me, would be screwed. If MS made everything install only, like the PC, then they would need to drop the price of hard drives considerably. Because, honestly, paying almost $200 for 120 gigs of space is highway robbery. You could buy a 320 gig hard drive for half that for the PC, so they can't cost that much to produce.

"DVD, and developer support.

Right now Sony has the advatnage with Cell, and Blu-ray, but devs are not taking advantage of them. This leads me to believe that the same would happen with the extra memory added to the Natal. Also as of right now MS is already battling despratly over disc space. Doubling the assets would mean every game on multiple discs, or very small games.

So I think if this happed, only MS games would see the benefit, and unless it started selling like the Wii that would not change.

I think it may be wiser just to stick to the 2013 - 14 for new consoles."

I didn't want to deal with the optical drive in the original post because it would have made it too long. In every change they would make to the hardware they have to consider it from a cost and revenue perspective. I.E. Does this change give them more revenue OR does this change reduce the cost of the console OR both. Anything which doesn't meet this criteria cannot be considered as a plausible change to the hardware.

Now in regards to the optical drive they do have two options they can implement either at the same time or either/or.

1. Implement Blu Ray in the console.

They would do this only if they could off-set the cost of this change with additional revenue. Implementing Blu Ray for the Xbox 360 doesn't make sense because it would be an identical implementation to the PS3. The Xbox 360 could not benefit from this but improved Xbox hardware would. They can implement hybrid DVD/Blu Ray discs as the technology is maturing and the Natal hardware makes sense for Blu Ray as the Natal hardware can be used as a media centre interface. So rather than paying for the cost of the Drive + $10 per console for a royalty they can charge the end user $30-50 to implement Blu Ray movie playback and turn it into a profit centre/break even proposition and give the end user one more good reason to purchase an Xbox Natal.

2. They can use the reserve space on their DVD discs. Xbox 360 discs are 6.8GB, Dual layer DVD discs are 8.5GB. They have 1.7GB of space spare. This is the cheaper option of the two to implement as it doesn't require any changes to the discs at all. They lose 1GB of space to the DVD movie that plays when you put it into a DVD player and if they used that they could put all the Natal upgraded console specific code and data in there like more advanced assets, game engines etc so the same disc put into a Natal console could display in full 1080P with 3D if desired.

As for the Ram. Theres a dual purpose which I feel justifies the increase. The current Xbox 360 devotes 32MB of ram to the OS functions, if they increased that to 100-200MB they could implement advanced Natal features like having a visual display of your team-mates using the Natal camera in game rather than audio only, improved audio quality etc. However the real reason to do this is so they can implement advanced services such as a form of Natal Windows for those who wish for it. They have no reason to not allow people to browse away from Xbox Live if they earn a subscription for ceding that right. They don't need a full 1GB of ram for 1080P assets, a simple doubling of Ram allocated to video memory would be enough.

@Squill

Good points. I was thinking a BD Drive would be a little spendy, and I was worried about seperate versions for 360 and Natal, but I never thought of the hybrid discs. If they went that route it could help the dev support since they could make full use of the space on both the PS3 and Xbox Natal.

The DVD route I still see as a bad way to go in this scenario. I just don't think they have the room. Even opening up the extra space, things would be tight.

As for your OS ideas, I really like that direction. Whether or not they do Xbox Natal or not, that is something I deffinatly want to see in the future.