CES: External HD DVD drive for Xbox 360
In mid-December Microsoft stated, "Microsoft, in both America and Japan, has not announced anything regarding the possibility of a next generation DVD drive being placed in the Xbox 360." It's true they never lied; the HD DVD drive won't be inside the Xbox 360, it will be an external drive. During the CES Keynote, Microsoft's Peter Moore announced the device: "The new drive will offer millions of Xbox 360 owners the ability to easily enjoy HD DVD movies and will provide consumers with even more choices for experiencing high-definition content, in either physical or digital form."
It is notable that he specified "movies" and not gaming. If they offered two tiers of games, DVD9 and HD DVD, it would alienate the consumers who do not own the external drive and aggravate developers whose next-gen development budgets will be stretched as it is, without multiple console variations. This external drive is Microsoft's response to Sony's relentless Blu-Ray marketing, an effort to remove this contention from the next-gen purchasing decision. Will a low priced, next-generation DVD player really help sell consoles? Microsoft still has to ensure that HD DVD wins the console war! Clearly there are plenty more battles left in this war.
[Updated to reflect that this portion of the keynote was delivered by Peter Moore and not Bill Gates]
