Microsoft's Xbox One is in a bit of an awkward spot. On the one hand, Sony's PlayStation 4 is substantially outselling it and has clearly won the hearts of gamers everywhere. On the other hand, built as a games machine it's too expensive to take on the plethora of streaming media systems from the likes of Apple and Roku.

But the unique opportunity forced on console companies by the combination of 4K video and virtual reality gives Microsoft the opportunity to solve both of these problems not just now, but forever. By treating its console a bit more like a PC, the company could offer not just the high-end gaming machine that console fans crave, but also a $150 system able to go head-to-head with the Apple TV and every other gadget that's trying to turn the TV into an app platform.

From the moment of its first unveiling, it was clear that Microsoft wanted the Xbox One to be all things to all people. It had games, of course, but it was not merely a gaming system. Microsoft positioned it as an all-in-one entertainment system, with games, music, and movies all as core features. Official TV tuner accessories have been added, along with limited DVR-like capabilities. This summer it will be extended further still, with the Xbox One adding apps built for the Universal Windows Platform.

The problem for Microsoft is that all of this has meant that the Xbox One is neither one thing nor the other. The Xbox One can do many things, but if your interest is solely gaming, then the PlayStation 4 is arguably the better platform: it has a more powerful GPU, and initially at least it was meaningfully cheaper, because it didn't include any counterpart to the expensive Kinect accessory. If your interest is streaming media and light applications, the Apple TV and any number of similar streaming boxes are substantially cheaper. The Xbox One also has some gaps in this regard; HBO Now, for example, is available on the Roku and the Apple TV, along with various Android devices, but it isn't found on Microsoft's system. The Xbox One has an excellent TV user interface but is limited to half an hour of-time shifting and lacks a really good system for recording cable in the US. Dedicated DVR boxes do the job better.

In the summer update the Xbox One will also gain access to Microsoft's Cortana digital assistant, but even if this is what you're after, the Amazon Echo is a cheaper way of achieving the same thing, as is the current generation Apple TV with its microphone-equipped Siri-supporting remote.

The Xbox One is a solid choice if you want something to fill one or many of these roles, but this multipurpose nature leaves it mastering no one task.

Second best

The area in which this has been most painful is clearly gaming. Sony's gaming machine was cheaper and more powerful and accordingly has outsold the Microsoft system by about two to one, with gamers showing that they have relatively little brand loyalty, but a fair degree of price—and performance—sensitivity. But the fact that Microsoft did have a considerable interest in gaming means that in turn the Xbox One is far too expensive when compared to a wide range of HDMI sticks and set-top boxes. The system is at once too much and not enough.

Traditionally, this might be a big problem. Consoles have fixed hardware—various attempts in the past to produce performance-enhancing accessories have been largely unsuccessful—giving companies little ability to improve the core capabilities of a system part way through its lifetime. But there are indications that this generation might be different. Fortunately for Microsoft, although the PlayStation 4 is a more powerful machine, the fact is that both the Sony box and the Microsoft one are relatively underpowered. Neither can reliably manage a sustained 60 fps at 1080p for highly detailed games. That's unfortunate enough for current gaming standards, and with both 4K and virtual reality (VR) poised to grow, their hardware looks even more anemic.

Without a massive reduction in graphical complexity, 4K gaming is clearly beyond the reach of both systems. They struggle at 1080p; pushing four times as many pixels is going to be beyond them. Virtual reality is also a graphical challenge. In conventional gaming on a monitor or TV, it's acceptable, albeit undesirable, to drop from 60 to 30 frames per second if a scene is too taxing for the GPU. This is unacceptable in VR, where frame rate and responsiveness to input are much more important. We know that the PSVR is capable of supporting VR, but it cannot do so while offering the kind of graphical complexity found in regular, non-VR gaming; the burden this would place on the GPU is simply too high. Microsoft hasn't yet announced any VR platform, but it too would suffer a graphical shortfall.

Addressing this demand leaves both companies in need of a rather earlier hardware refresh than might otherwise be expected, and this in turn gives Microsoft the ability to fix its performance shortcoming. There's already extensive speculation that Sony is going to offer a mid-life revision to the PlayStation 4 hardware—and there are now signs that Microsoft is planning the same.

But quite what this new hardware might be at the moment isn't clear; it could be a minor refinement of the current system, perhaps to make it smaller or add 802.11ac; it could be a version that cuts the optical drive in favor of downloads only, it could be a system with an upgraded CPU and GPU similar to Sony's rumored efforts—the options are many and varied. The only thing we know is that Xbox chief Phil Spencer has said that he feels that any upgrade should "move forward in big numbers" and retain backward compatibility so that gamers can keep their library of games for many years, or even decades.

A big hardware upgrade, to keep up with or even surpass Sony's upgrade, would be great for gamers and would go a long way toward addressing the Xbox One's biggest weakness as a games machine. But this would come at a cost: games machines can't be cheap (there's simply no way to do effective 4K or VR on cheap hardware) which would make the Xbox much less competitive as a streaming media system, a TV app platform, a DVR, or a ubiquitous digital personal assistant. Given the investment made in these areas, and the signs that they're areas that appear to be growing in importance, this is a high price to pay.

A solved problem

But the good news for Microsoft is that it's already experienced with a market where machines can have a range of different purposes at a range of different price points, because that's how the PC market works. PCs aren't sold on a one-size-fits-all basis the way consoles are; there are lots of them, at a whole range of different price points. Microsoft could, and should, bring this sensibility to the Xbox.

This means not just a high-end system with stronger performance, though it does mean that, among other things. Microsoft needs a system that can go toe-to-toe with whatever Sony puts on the market, as a bare minimum, with a faster GPU and perhaps a faster CPU and upgrade to 802.11ac, too. This system would need to keep its optical media to provide easy access to existing Xbox One and even Xbox 360 games (it might even justify an upgrade to support UHD 4K Blu-ray discs), along with abundant internal storage to install games. Calling it "Xbox 10" would make sense, given Microsoft's Windows 10 push.

It also means a system costing $200 at most, better $150, that can run UWP apps, Cortana, and play streaming media. Such a system should be a close sibling to the Xbox—Microsoft's current TV interface is attractive and effective, albeit a little slower than some people would like—but should omit one key Xbox feature: the ability to play "real" Xbox games. Ditching this requirement means that Microsoft can remove some components, such as the Blu-ray drive and large hard disk (using a smaller amount of flash storage instead), and use a cheaper, slower system-on-chip with less RAM.

Such a machine would be able to go head-to-head with the Apple TV, Amazon Echo, Roku, and so many other similar gadgets. It would still be pricier than the Chromecast and other ultra-cheap HDMI sticks but would offer capabilities to justify this extra expense. Such a system wouldn't be devoid of gaming entirely, as some UWP games will be developed. It would also be well-equipped to handle streaming from a "full" Xbox, or even a Windows 10 PC.

Longer term, Microsoft should be bolder still. No console sold this year, or even next, will be a good system for 4K or VR. Just as today's consoles are technically capable of 1080p60 but struggle to maintain it in real games, any plausible 2016 system will be similarly unable to sustain 4K. It's inevitable that the requirements needed for high-quality VR will continue to evolve. If either or both of these things catch on in a big way, they'll leave the consoles looking old and tired almost overnight. Microsoft and Sony simply aren't willing to subsidize the hardware at massive cost to them the way they were for the Xbox 360 and PlayStation 3 generation. The baseline for a high-end VR experience right now requires a $200 discrete GPU minimum (both the Oculus Rift and the HTC Vive demand an Nvidia GeForce GTX 970 or better), with 4K easily doubling that, and that doesn't fly in a console costing $300 to $400.

Future innovations driven by VR—untethered headsets, different systems for positional tracking, eye tracking, novel input systems—will similarly put new demands on hardware. This means that even if both companies do offer an upgrade this year, the pressure will be on for them to do the same in another 2 to 3 years to keep pace with that VR's evolution and the state of the art in the PC space.

Why not make the Xbox into an app?

In the past, refreshing consoles this regularly would be a big problem because each new generation was incompatible with the previous one. But that's no longer so likely to be the case; today's consoles are more or less specialized PCs, and in all likelihood, tomorrow's consoles will also be PCs. In this world, new consoles can be faster and better than old ones, but they can run all the same games. Just as on the PC, running a new game on the previous iteration might mean a reduction in graphics quality, but it should still be fundamentally the same game. It becomes practical to update consoles to allow them to keep pace with the trends and preferences among gamers and accommodate growing technical demands without forcing anyone to rush out and buy new hardware every few years.

Microsoft could build this hardware itself, but if these are PCs, even that aspect could be made more PC-like: set performance and reliability standards and then let third parties build the boxes. When Valve first introduced its Steam Machine concept, it looked as if it would define a range of performance tiers that systems and games alike could target, ranging from a steaming secondary machine up to a high-end gaming powerhouse, though ultimately the company has backed away from this plan. It nonetheless feels like an approach that Microsoft could use for the Xbox. Rather than have the Xbox be a special-purpose console, make it a PC that boots into the Xbox interface.

While there would be some work required to put the Xbox dashboard onto a PC (though it'd probably make a lot of people very happy if Microsoft did—it'd form a great basis for a replacement for the beloved Windows Media Center), with the increasing unification of Microsoft's platforms, it shouldn't be insurmountable. There would need to be some kind of validation for drivers and games alike to ensure they have console-like reliability, too (though console-like reliability ain't what it used to be in these days of day one patches).

Do this, and Microsoft will have a games platform that can keep pace with the best of PC gaming, hit price points all the way from Amazon Echo through to PlayStation 3, and strengthen the value of both Windows and Xbox together.