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Oh, that'd piss me off so bad if Xenon didn't have a hard drive and backward compatibility.
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I'm just speculating, but I assume that MS is taking the HDD out because of hackers/game pirates. Backwards compatibility... rumor is that no next-gen consoles will have it. Too expensive. Apparently, the hardware will be "so advanced" by then, that it wouldn't be financially sound to add the feature. In other words, the sales loss resulting from stubborn people who wouldn't by the Xenon/PS3/Revolution without backwards compatibility will be nothing compared to the cost of actually implementing the feature.
Again, speculation. But if the rumors are true, it would seem that consoles might be moving farther away from PCs instead of closer.