There's a simple progression at play here. When creating the first Xbox, Microsoft was in a rush, so they teamed up with their old buddies at Intel who were happy to provide a modified Celeron chip; unfortunately, not owning the silicon led to an inability to enjoy the inevitable cost savings that future revisions would allow. So Microsoft tried something new for the 360: outsourcing. They hired IBM to design and build a modified, triple-core PowerPC processor and -- since they own the design -- they'll be able to enjoy significant cost reductions as smaller manufacturing processes are implemented (like the one scheduled to happen in 2007). What's the next step? Why, designing their own processor, of course!
According to an article in the New York Times, the software giant's offices in Redmond and Silicon Valley have teamed up to create the "Computer Architecture Group." According to Charles P. Thacker -- a veteran of the venerable Xerox PARC facility and the Microsoft engineer who will head the Silicon Valley group -- one reason for the inception of the CAG (as it's become known to, well ... us) is because "Microsoft needs to begin thinking about the next-generation design of its Xbox game console."
A Microsoft spokesperson was quick to point out to GameDaily BIZ that Microsoft "has no plans to design and test computer chips. This is research, not product development." Well, fine. But if it's not going into the next-next-generation Xbox (720?) what are they going to do with all that research then?
[Via Xbox 360 Fanboy]