[Gates] told the annual meeting of the Society of American Business Editors and Writers that Xenon's software menu would be similar to that of the company's Media Center edition of Windows, which is designed for computers meant to be located in the living room.
"If you're used to that menu, when you use this Xenon you'll see a menu a lot like that that lets you get photos, TV, music and all those different things."
This is hardly surprising, as the original XBox was largely about having a presence in the living room.
The Media Center "failed" (I say this in the mass market success) largely because it was not a consumer device. The primary factor here is cost - TiVO and other such devices are priced in the hundreds of dollars; most MCEs are powerful computers and priced accordingly. Granted, we've seen some cheaper options lately, but still nothing close to the $200-300 price point. Of course, the MCE offers more functionality, but much of that is lost in the context it is usually used. More importantly, it doesn't have the ease of use requisite for a consumer device (or things like instant-on). More importantly, regardless of how stable the OS really is, there will always be the perceived "hassle" of a computer for the average consumer. (Of course, it wouldn't hurt if more of the cases looked like this).
The XBox, on the other hand, is a consumer device. It is priced appropriately, and many are comfortable having it in their living room. If they offered a next-gen console that also had TiVO functionality at some price below $500, I have to imagine a LOT of people would buy it (especially if they continue to offer the guide service for free - TiVO and other DVRs charge a monthly fee in excess of $10).
Microsoft is also expected to adopt a micropayment structure with the XBox360 and an expanded XBox Live! service. Personally, I think this model translates very well to other types of entertainment as well. (Economies of scope?) In fact, several such services are already integrated into the MCE interface.
It will be very interesting to see where Microsoft intends to take the XBox. I guess we'll know more on May 12th.
On a side note, it wouldn't surprise me to see Sony introduce such functionality in the PS3, especially in light of the PSP's convergent features.