I had previously penned my thoughts regarding the PS5, which you can read here. Though, as made evident as this generation has progressed, it is increasingly clear that Microsoft and Sony are pursuing different strategies. This is obviously a good thing as this leads to differentiation, a concern I had at the onset of this generation given how both the base Xbox One and PS4 were quite similar in their technical makeup, minor differences such as RAM aside.

This differentiation appears to continue in the rumors and reports surrounding these next-generation consoles. The latest rumors from the Microsoft camp comes by way of a report from Thurrott.com which points to the development of not one, but two distinct next-gen Xbox consoles.

Keep in mind, absolutely none of what I’m about to discuss is confirmed. This is all complete speculation until we actually have some sort of reveal from Microsoft. With that said, the report makes mention that one of these machines will be a traditional discrete console, dubbed Scarlett. The other will be a lowered power machine meant specifically for game streaming, i.e. cloud gaming codenamed Scarlett Cloud.

“The second ‘console’ that the company is working on is a lower-powered device that is currently planned to ship with the next generation device that is designed for game-streaming. But the catch here is that Microsoft thinks it has figured out how to handle the latency sensitive aspects of gaming.”

The report continues.

“The cloud console will have a limited amount of compute locally for specific tasks like controller input, image processing, and importantly, collision detection. The downside of this is that it since more hardware is needed locally, it will raise the price of the streaming box but it will still cost significantly less than what we are accustomed to paying for a new-generation console which should help expand the platform’s reach.”

It’s important to keep in mind here that the console business model console manufacturers typically use is loss-leader. Essentially, sell console hardware at a loss and make up for it with software and services (games, Xbox Live, Xbox Game Pass, PS Now, etc.)

This Scarlett Cloud looks like it could allow Microsoft to have their cake and eat it too. A lower cost box plus longer term software and service subscriptions equals much larger potential profit margin. In theory, this could be a big win and could potentially help offset the higher cost Scarlett machine. In theory. I have my own speculations regarding cost offset, which I discuss further on.

The report continues, discussing cloud gaming.

“The benefit here is that Microsoft’s cloud platform reaches around the globe with data centers in every major market. This makes streaming the games platform available globally but this also likely means that it can run on any type of device. Of course, Microsoft would love you to buy their hardware but the company’s end-goal is that you can access ‘Xbox’ from any device, anywhere and Scarlett Cloud is looking to deliver on this idea.”

This is very much aligned to what Phil Spencer has discussed publicly before at various trade shows, most obviously with the announcement of the Xbox Play Anywhere initiative and, more recently, weighing in the Fortnite cross-play controversy with Sony during his annual E3 interview with outlet Giant Bomb.

“If you bought your son, your child, an Xbox, and I bought my child a PlayStation – and I’m just a parent, it’s their birthday, whatever – and the kids want to go play Fortnite and they all of a sudden go home and can’t play with each other, it doesn’t feel like it helps the consumers…If it doesn’t help the developers and it doesn’t help the consumer, then it doesn’t feel like it helps to grow gaming to me.”

The Thurrott report continues and includes information on how games will be handled on Scarlett and Scarlett Cloud. In short, all Scarlett games will run on all Scarlett devices, so a next gen Xbox game won’t only be on Scarlett and not on Scarlett Cloud, for example. You’ll just buy an Xbox game and it’ll work across both devices. There’s no exclusivity in that regard.

The bit that really interests me, however, is the cloud gaming piece. Cloud gaming, at least conceptually, as been around for decades. It’s not really a new idea. However, it just hasn’t seen success, the most prominent example being OnLive.

Nvidia announced their own streaming service, Geforce Now, a few years ago. In fact, I’m currently in the beta. And honestly? It’s incredible. I consider myself a highly discerning individual when it comes to latency, framerate, visuals, resolution, and the general technical makeup of a game. And I’m legitimately impressed with GeForce Now. Minimal latency, great visual quality, full 1080p resolution, and fluid 60fps. To me, GeForce Now is the yardstick by which all cloud gaming services must be measured.

Of course, the single greatest limiting factor when discussing anything cloud-related is Internet speeds. According to a report from Cable, along with partner and data provider M-Lab, the average US connection speed is 25.86 Mbps. Per the GeForce Now requirements page, the connection they require for 1080p 60fps gaming is 25 Mbps. Granted, GeForce Now and Microsoft’s purported cloud services will be different, but I don’t believe the Internet connection required will vary too much.

But, that average US connection speed is exactly that — an average. Mathematically, this means that 50% of the speeds are higher, and 50% are lower. Additionally, we need to consider the sheer size of the United States. Meaning, smaller pockets of urban high speed connections can easily counter the larger vast swathes of rural low speed areas, thus driving that average US connection speed up. This is why, while important, this average speed may not necessarily be representative.

And this is crucially important to understand when discussing any cloud-based service. Large chunks of your demographic may not necessarily have access to the kind of speeds required to drive a smooth cloud gaming experience. Keep in mind, slow Internet connections will limit these rural gamers’ ability to digitally download games as well. And when you also consider data caps for various ISPs, it becomes increasingly clear that the Internet becomes a very real limiting factor for many consumers. Because of all this, I believe a better simpler solution is staring us in the face, which I shall discuss below.

All this naturally leads to several unanswered questions. For one, what will the cost and business model be for Scarlett Cloud? If Microsoft does go this dual console route, I think it could make most sense for an upfront cost of $250-299 for Scarlett Cloud. Because of the nature of this machine, Microsoft should combine Xbox Live and Game Pass into one annual cost (something I think they should have done when Game Pass was announced, frankly) and sell this subscription for Scarlett Cloud. Microsoft needs to be cognizant of pricing for Scarlett Cloud and avoid another moment like they had with the launch of the $500 Xbox One in 2013.

What is the quality and performance we can expect to see from Scarlett Cloud? Like I mentioned, GeForce Now is incredible and is my yardstick by which to measure all cloud gaming services against. Will Scarlett Cloud offer 1080p 60fps? 4K 60fps? The off-the-shelf technology is there to render this stuff (just look at PC hardware from 2017) and should be relatively inexpensive at scale, especially by the time these consoles potentially launch in 2020 (this is to say nothing of the more custom hardware typically found in consoles). This could, in theory, lead to a situation where the traditional Scarlett console could be “inferior” if it cannot output 4K 60fps when Scarlett Cloud can. Will there be parity in quality and performance between Scarlett and Scarlett Cloud? I hope not.

But now back to that simpler solution I mentioned above. We’ve seen this dual SKU approach before with the Xbox 360, PS3, and now more recently in this generation with the base consoles and their enhanced bigger brothers. People may point to this as justification for this dual SKU business model reaping profit. However, I think they’re missing one fundamental fact from this assumption.

In this generation, while we do have two models each for the Xbox and PlayStation, these two models did not launch simultaneously. This means that the base consoles, the Xbox One and PS4, have been on the market for much longer, meaning, the production costs for both have decreased leading to higher margins. This margin allows for the sale of the more expensive Xbox One X and PS4 Pro, offsetting the costs somewhat.

If Microsoft launches with two consoles next generation, I don’t think that same trick can work. I believe the custom technology in those machines and the bespoke manufacturing processes required would be too new in order to offset the higher cost of Scarlett with Scarlett Cloud, even when taking into account the software and services.

Additionally, we must consider the human element. Imagine being a kid and you want an Xbox to play with your friends. You ask your parents to buy you an Xbox. But, because there are two consoles to choose from, which one do you buy? Both say “Xbox.” Is one better than the other? Does one have limitations over the other? It’s not hard to imagine a scenario where non-tech savvy parents need to go out and buy a console for their kids only to be confused by the multiple consoles in front of them.

Thus, I believe this simple solution will tackle this human element problem and the Internet connection problem. Rather than have two consoles with two different use-cases, simply create one console that addresses all use-cases. In other words, just launch with Xbox Scarlett. One device. That’s it.

Live in a high speed area and want cloud gaming? Cool, you’re covered. Live in a rural area with crap Internet but still want to play? Cool, just buy that same single console that your city friends have and you’re good. Are you a parent whose child wants to play games? No problem, just buy the single Xbox and go home to your kid a hero.

Offering a single console that does cloud gaming, digital game downloads, and local disc-based gaming offers great benefits, in my opinion. You account for all these different use-cases regarding Internet connections and confused parents. As a business, you can also get away with charging $450-499 for this machine simply because you’re offering all this value to justify that price.

Personally, I hope this single-console route is the one Microsoft chooses to pursue. I strongly believe in cloud-gaming, especially having experienced GeForce Now firsthand. But I also fundamentally believe in a holistic approach when involving consumers. Simplify and execute. Deliver true value. Prioritize the human element. These are all things I believe Microsoft must consider when developing for the next generation. I’m hoping to see good things.