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Game consoles are just specialist computers and so, like all computers, they obey Moore’s Law. This is something that it is very important to keep in mind when looking at the console generations. Moore’s Law states that the number of transistors that can be placed on a chip doubles every two years. So if a new console is launched 6 years after its predecessor it will be 8 times more powerful. This also means that a given game console should approximately halve its manufacturing cost every two years. It is these realities that drive our gaming hardware forward.

Now let’s look at our current generation of HD consoles, the Xbox 360 (first available Nov 2005) and the PS3 (first available November 2006). These are both architecturally very different from their predecessors, the Xbox and the PS2. This meant that the whole industry had a massive learning curve to get games working well on them. We have now climbed that learning curve and are driving these machines to pretty near the max, so in pure processing terms games are not going to get much better on them.

The next generation of home consoles from Microsoft (NASDAQ:MSFT) (definitely) and Sony (NYSE:SNE) (probably) will be just massively upgraded developments of the current generation. They will simply use the latest evolutions of the same CPU and GPU families. Their introduction will not be industry disruptive because they will be 100% backwards compatible. Not just with games, but also with online services like Xbox Live.

So when will we see these machines? It is simply a matter of choosing when to freeze the specification of the processors. The longer they leave it, the more powerful the machines will be. Moore’s Law. But there are huge advantages of being first to market, as Microsoft proved with the Xbox 360. So it is a matter of balancing commercial reality against computer power. In the past this balance led to new consoles being introduced after approximately 5 years. Which means that a new Xbox could be with us next year (2010).

But now we have Natal to muddy the waters. Natal is a step change in what video gaming can do and puts Microsoft a long way ahead of its competitors (presuming Natal works as advertised). So effectively adding a Natal unit to an existing Xbox 360 gives the user a jump in capabilities comparable with buying a new generation machine.

This brings us to two scenarios. The first is that the Xbox3 / Xbox 720 will be with us next year fitted with Natal as standard and that Microsoft just showed us the Xbox 360 version at E3 to demonstrate the technology. The second scenario is that Natal gives Microsoft breathing space to delay the introduction of a new machine by, say, a year. Thus making the new console significantly more powerful. Certainly Microsoft will have had many internal strategy meetings to work out which of these scenarios works best for them.

Currently the rumour machine is going for the first option and Microsoft aren’t denying it. Which would put the new machine in your local shop in 18 months time. Start saving.

Disclosure: No positions

Source: Here Comes Microsoft's xBox 3 / xBox 720