Microsoft is currently developing its next-generation Xbox, with recent reports suggesting the console will launch in 2020. While the hardware will undoubtedly surpass the capabilities of the current Xbox One X console, Microsoft is also focusing on game streaming for the future of Xbox titles. Thurrott.com reports that Microsoft is also working on a second Xbox console that will be limited to streaming games.

The streaming-only console will reportedly include a low amount of local compute for handling tasks like controller input, image processing, and collision detection. These tasks are essential to reducing latency in game streaming, and Microsoft is said to be planning to slice up processing between the game running locally and in the cloud in order to reduce input lag and other image processing delays.

Microsoft is currently developing its next-generation Xbox console under the Scarlett codename. The software giant recently revealed it’s also working on a game streaming service for Xbox that will work across any device. This is a key part of Microsoft’s future plans with Xbox, and part of the company’s vision for developing its “Netflix for video games” service, Xbox Game Pass.

XCloud service is on the way

Sources familiar with Microsoft’s plans tell The Verge that Microsoft is currently “all hands” on creating datacenters capable of powering the company’s game streaming service. Referred to as codename “XCloud” internally, Microsoft has been experimenting with combining four lots of custom Xbox consoles into a single server blade for its datacenters. These servers will launch initially with developers in mind to build and develop games in the cloud instead of local debug machines, and then to stream games to consumers.

Sony developed similar custom PlayStation hardware for its own PlayStation Now service, allowing consumers to stream PS2, PS3, and PS4 titles to PCs or PlayStation 4 consoles. Microsoft is planning to let a variety of devices, including mobile phones, access its own service once it’s available. Microsoft is investing significantly in its cloud streaming service as the company works towards growing its gaming business through recurring subscription models rather than just margins from console hardware and software sales.

Microsoft’s gaming revenue increased 39 percent in the recent quarter, driven primarily by software and services revenue growth of 36 percent. Microsoft has fallen behind Sony in the current generation of console sales, and now sees a clear opportunity to create a cross-device service for cloud streaming games. It won’t be an easy victory, though. There are a variety of game streaming services available to consumers right now, including GeForce Now, PlayStation Now, Shadow, and Liquid Sky.

Competition is strong, but none of the current services have fully addressed latency issues in fast paced games like first-person shooters, so Microsoft’s hardware approach could prove key to addressing some of those problems on the console side.