We think Microsoft is going to make a clean break here. In order to really move forward with its online services and focus on the future, it's going to make the new Xbox incompatible with the old. It will keep selling the Xbox 360, at a cheap price, for another year or two. Now that the Playstation 4 has been announced as not compatible with PS3 games (the company may use an online game-streaming service to fill that gap), it's even easier for Microsoft to pull the trigger.
Speaking of online functions, we expect big things from the next iteration of Xbox Live. One recent report suggests that Microsoft will change friends lists to work more like Twitter, where you can follow someone without them necessarily following you back. This, together with abolishing the 100-person limit, seems like a very smart move. Sharing is sure to be a big part of the new Xbox Live. The new box may record a video buffer of your games as you play, allowing you to go back, select highlights, and post it to social media sites.
Achievements, one of the more successful innovations of this console generation, will almost certainly get an overhaul, too. Developers will probably be able to include more achievements, add them more often, tie them to real-life events or make them available for a limited time (e.g. "play this weekend for a special achievement!"), and even tie achievements together between games and between other Microsoft platforms. The cynic in me sees achievement awards on the inside of Mountain Dew caps already. (Achievement Unlocked: Do the Dew!)
Interestingly, scuttlebutt says that Microsoft intends to dump Xbox Live's own proprietary chat service in favor of Skype. This would be excellent news; not only does Skype provide dramatically better audio quality, but the prospect of cross-chatting with regular Skype users is enticing. And with a Kinect in every box, everyone could easily make Skype video calls from their living room.
Unfortunately, we still expect Microsoft to offer two tiers of Xbox Live service, free and Gold, with far too many services held back for Gold subscribers. There's no reason you should have to be a Gold subscriber to access Netflix or Hulu Plus, but Microsoft doesn't need a new console to bring that to an end. It could stop that nonsense at any time, and it hasn't yet.
Built on Windows 8 (not that it matters)
It is said that the software stack for the new Xbox will be built on the same foundation as Windows 8. Given the hardware architecture, that seems likely, but also unimportant. It's not as though it will actually run Windows 8 applications. The operating system would be highly modified, tailored for the task of running a set-top entertainment box, and controlled with game pads and Kinect.
Sign up for CIO Asia eNewsletters.