New rumors have surfaced via Digitimes that Microsoft is planning to include an integrated HD-DVD drive in the Xbox 360. The rumors have the new Xbox surfacing as early as the first half of 2007, according to the unnamed sources within the Taiwan optical drive industry.

Microsoft’s smackdown and denial of the rumors should hit soon, since the company has been adamant that HD DVD would only be for games. The last time this was suggested by Toshiba, Microsoft was quick to issue a denial. There are a number of reasons why this would be a bad idea on Microsoft’s part. First, they would splinter the market between those that have the HD DVD and those that don’t. Second, the cost of the HD DVD drive would make this prohibitive. While absorbing a loss on each Xbox 360 console makes sense to Microsoft while building a user base, the loss is mitigated by the fact that Microsoft gets license fees from game publishers for every game sold. Adding an HD DVD drive only adds to the loss, without adding more to the bottom line. Third, while Sony is launching with a Blu-Ray drive, they haven’t shown yet that this is the course that the consumer wants to take. Microsoft has time to sit back and evaluate the market and decide later as things develop. Fourth, the backlash from existing consumers would be great if Microsoft released an updated console within the first 18 months of the console’s life span.