I don't know who it is or where they are, but the rumored Xbox 2 specs are clearly evidence that somebody is ingesting dangerous quantities of some mind altering substances.

Let's take this "information" apart piece by piece.

The first point is the lack of a hard drive. The article says on this point:

The current Xbox has an eight-gigabyte hard disk drive. That drive is useful for online games and storing game art, but many developers chose not to make use of it. As a result, Microsoft seems to have decided that saving the $50 the hard drive costs outweighs its benefits.

This makes no sense on its face, the only question is whether this is a bit of bogus information that just proves that the media will snap on any scurrilous bit of rumor they get, or evidence that after a fairly good showing with its first gaming console, Microsoft is headed for a sophomore slump of Biblical proportions after having failed to learn anything, even from its own marketing hype.

The killer advantage of the Xbox was supposed to be the ethernet port, for online gaming and downloadable content. Unless this thing is going to have a built-in optical drive with write abilities, the removal of the hard drive means no online updates, no downloadable content. Perhaps that experiment has been abandoned, although it was only a few short weeks ago that the company was talking about the success of the program with MechAssault, the first Xbox game that offered downloadable content.

Even with the platform a static development target, console games are reaching a point of complexity where bug-free games are hard to make, and the only way to fix them is online patches. No hard drive, no patches.

The speculation that this move is to control console costs and reduce loss makes no sense. All the console makers take a loss on the hardware and profit on the games. If you can't do that, you don't have a console business. Also, targeting Sony for the next round of competition is premature. Microsoft largely failed to position itself as a clear #2 in the market, in many places running neck and neck with Nintendo, except in Japan, where they got trounced. If anything, they should continue to offer superior value and a good price point-- even if that means significant losses on hardware-- and use their ability to subsidize their gaming studio with their other businesses to drive Nintendo into a software-only role like Sega. It's unlikely that will ever happen completely, as Nintendo virtually owns the portable gaming space, but still, the nearest target for Microsoft in the market is Nintendo-- not Sony If Microsoft thinks that a photo finish for second place in a three-horse race is good enough to start worrying about being a market leader, they've got another think coming. Perhaps someone should look at the Sony sales figures again.

And lastly, it isn't clear if Microsoft will include the current DVD video technology or Blu-Ray, its successor. Blu-Ray will hold much more data, but it's unclear when it will be ready for market.

This also makes no sense at all. Both the Xbox and the PlayStation 2 have DVD drives; the GameCube uses a proprietary media format that stores less space. Halo, which shipped for the Xbox on a DVD and for the Mac and PC on a single CD, is still the console's best-seller. There's absolutely no indication that the limits of the DVD format are being approached, storage-wise. There's also no indication that there's any correlation between the amount of storage space a game requires and how good it is; if there were, then companies would still be making FMV games. To top it all off, this tidbit is in direct conflict with the goal ascribed to Microsoft elsewhere in the article, which was supposedly to control the hardware costs of the box. A Blu-Ray drive would almost certainly be more expensive than a normal DVD drive; even if is equal to the price of a current-spec DVD drive by the time the Xbox 2 is being produced, a standard DVD drive would still be cheaper. So let's sum this up: there would be no point in decreasing the cost of the Xbox 2 $50 by removing the hard drive and then losing that advantage by including a more expensive optical drive that is in no way necessary or demonstrably better.

Compatibility with the original Xbox, which is based on Intel and Nvidia chips, isn't guaranteed. Microsoft is concerned it would cost too much money in hardware or in licensing fees to enable the Xbox Next to play old Xbox games. This is risky in part because Sony's strategy has been to maintain compatibility with its old consoles.

I'd like to just dismiss this as bull as well, but unfortunately there might be a basis for this. In burning its bridges with Intel and Nvidia, it may very well be true that whatever licensing they'd need to do to make the Xbox 2 backwards compatible with an older console based on a different processor architecture and a different GPU vendor might be prohibitively expensive. The original deals for those technologies might not have included future hardware, allowing them to put the squeeze on Microsoft as punishment for abandoning them as vendors. Of course, any x86 compatible processor vendor would probably do as a replacement for the Intel chip in the original Xbox, so it's not likely that Intel's position is a factor, unless there are specific new technologies in the Xbox that were licensed separately. The GPU might be an issue, but this also seems unlikely: as the Nvidia chip in the Xbox was supposed to support a special new superset of DirectX as well as OpenGL, it would simply remain to ATI to make a chip that supported the same instructions. Millions of PCs around the world play the same PC games (with varying results, of course) on video cards designed by these two manufacturers, because they're using the same APIs.