Microsoft is talking about releasing their new X-Box console. I believe that Microsoft is releasing their new X-Box too early. And I also believe that if they release a successor to the X-Box without backwards compatibility, it will fail on Titanic proporitions. Here's why.
Microsoft is releasing their sequel to the X-Box too early. In the console market, it is usually better to release second. For example, when Sega released the Dreamcast. Sony announced the PS2. Although, the Dreamcast had some of the best titles for any console, ever (Soul Caliber, Shenmue). And the PS2's launch titles for the PS2 could barely compete with the Dreamcast's larger library of better games while being of about the same graphical quality. The Dreamcast still lost out. The reason for this is simple. Whatever the reality of the Dreamcast was, and it was good. It couldn't compete with the dream of what the PS2 was to be. All the shortcomings of the Dreamcast's reality were picked apart and feed for carrion. Since the PS2 in those days was just an idea, it was free from shortcomings and therefore perfect. Microsoft could pull the same manuever for the PS3, given that Microsoft releases the console with the right features.
As it stands, Microsoft's X-Box is good shape. It is leading in console online gaming. 3rd party titles that are released on all consoles generally look and play better on the X-Box. Titles that are released exclusively for the X-Box kick every other consoles ass (Ninja Gaiden for example). The longer that the three competeing consoles are Gamecube, PS2, and X-Box. The better the future of their console stands. The X-Box will pick off consumers from the other camps. When, they get an X-Box, they will be more likely to continue buying X-Box games if given a choice. When the numbers start showing that the X-Box is more popular, more exclusive development will take place. Further strengthing the console. It would be a mistake for Microsoft to break this cycle since it works to their advantage. Let one of your competitors do it first, then pull the PS2 launching trick (see above).
Releasing a X-Box Next without backwards compatibility with the X-Box dooms both consoles to failure. It sets the two consoles to compete with one another, which is the exact opposite of what you want to have happen as a platform provider. As a platform provider, you want your newest platform to enhance what your previous platform was able to do. For those that talk about, "Well, I'll just buy both consoles.". Microsoft shouldn't care about you. They already have you as a consumer base. They need to look at enlarging their consumer base. That means people that don't own an X-Box, and probably never will. You need to sell them on an X-Box Next. As cool as your console is in terms of hardware. What sells consoles are the games. If the X-Box Next releases without backwards compatibility, the only games that will sell an X-Box Next are games newly developed for the X-Box Next. If it releases with backwards compatibility, the X-Box Next can leverage all the tried and true great titles that were released for the X-Box (Crimson Skies, Mech Assault, Ninja Gaiden, Halo). If the X-Box next can enhance these games in some way (better graphics, possibly better texture filtering and N-Patches), then the decision becomes a no-brainer for everyone. This is what the PS2 did. This is what the PS3 will do. X-Box Next needs to do the same to be competitive.
The other bad part about releasing without backwards compatibility is the developers. What are 3rd parties going to develop for? The X-Box with the larger install base. The X-Box Next with better features. The answer is going to be the X-Box for quite a while after you release the X-Box Next. This hurts the new console considerably. This means that they will not get a lot of 3rd party titles for the X-Box Next during the first year. This, along with them releasing early will kill the X-Box Next. X-Box will be left to linger, and PS3 will just keep rolling right along without too many problems.
What amazes me the most about the whole situation, is that Microsoft, more than anyone else, should understand how this works. They took advantage of this very phenemenom for so long, and the lesson seems totally lost. People like Raymound Chen make Microsoft the company it is today. Microsoft needs to have confidence that the X-Box will be successful. It took some really serious blows early on (Sony convincing Rockstar delay the release GTA3). Japanese developers didn't embrace it for their RPGs. But, the X-Box has now established itself, and is in good position. It is frustrating to see a company in good position, about to make a mistake of this magnitude and end up worse than where they began. Microsoft was in a difficult position coming into the console market. They knew it was going to be tough. It turned out even tougher than they imagined. They have done a lot of things right. But, this misstep is going to erase it all.