Sources close to Microsoft's senior Xbox executives have confirmed that the company does not intend to make its next-generation console, which is set to be launched by late 2005, backwards compatible with existing Xbox software.
Speculation about the backwards compatibility functionality has been rife since it emerged that Xbox 2 - codenamed Xenon - will have radically different hardware to the original system, with a non-x86 processor, no hard drive and an ATI, rather than NVIDIA, graphics chipset, all of which would make running Xbox titles on the platform very difficult.
It was widely believed, however, that Microsoft had retained a team of hardware emulation experts to work on the problem - although concerns over the viability of such an endeavour were voiced by some experts, especially regarding the company's ability to emulate the functions of the graphics unit in the Xbox without violating NVIDIA's intellectual property rights.
GamesIndustry.biz has now learned that Microsoft does not plan to provide any backwards compatibility in the next-generation Xenon platform - and indeed, that senior executives at the company don't believe backwards compatibility to be an important feature for consoles.
According to a source close to the project, internal Microsoft figures suggest that only 10 per cent of PlayStation 2 purchasers were interested in the console's ability to play titles developed for the original PlayStation.
Although this still represents some seven million consumers on a global basis - which is around half of Microsoft's entire installed base for Xbox - the company apparently believes that allowing consumers to play existing Xbox titles on the next-generation hardware would not be a significant deciding factor for Xenon purchasers.
However, a report into the videogames industry published today by Wedbrush Morgan Securities senior vice president Michael Pachter disagrees with this conclusion - arguing that failing to provide backward compatibility could have the effect of alienating Microsoft's existing Xbox installed base.
"In the event that Xbox Next is not backward compatible, we think that the device will be very slow to grow its footprint," the report warns, while elsewhere it suggests that such a move could damage the company's long-term prospects for the console.
"We do expect Microsoft to launch its console first, perhaps as early as 2005," says Pachter. "Should it choose to do so without backward compatibility or significant third-party software support, we expect to see its first-mover advantage evaporate."