A major overhaul of the Xbox Live platform is in the works, with the console set to get new online functionality including the ability to talk to friends outside of games and use streaming video and audio services.
Microsoft is expected to announce the new features at E3 next week, although the company hasn't confirmed anything as yet - saying only that it is planning "groundbreaking announcements" at the show, and making vague grammar-bending comments about "innovating the Xbox platform".
One of the key expected upgrades will be to the Xbox Live buddy system, which currently allows players to locate their friends in-game and converse with them using the voice system built into Xbox online titles. Microsoft is now expected to expand this functionality onto the Xbox Live dashboard.
This means that players will be able to see if their friends are online and initiate voice chat with them without starting a game - effectively giving the Xbox its own version of IP telephony, and giving Xbox Live users the ability to effectively make long-distance voice calls for free.
Another major update to the system will be the ability to play music and video either off the Internet or off a PC on a home LAN with the Xbox. At present this functionality exists on chipped Xboxen running third party software; Microsoft may well hook the console into its own DRM (digital rights management) systems, thus allowing people to purchase or rent films and music online and play them on their Xbox.
This upgrade would effectively make the Xbox into a living room media centre as much as a console - something which commentators have been predicting since the console was first announced several years ago. It would certainly make the Xbox into a more attractive option for many consumers, and through the online movie and music purchase or rental systems, would give Microsoft a new way to recoup its losses on the Xbox hardware.
One thing which still hasn't been mentioned officially, but which may well happen in the future, is the integration of Internet Explorer with the console. If these rumoured upgrades turn out to be true, the Xbox will effectively have variants on the Windows Messenger, IP telephony and Windows Media technologies built-in; the one key component of Microsoft's online services that's missing is Internet Explorer. There's undoubtedly a worry, however, that should the company integrate IE into the box, people will start buying the Xbox purely as a set-top box - which is almost exactly what Microsoft is trying to prevent with its crackdown on mod chips.