Microsoft is building an Xbox set-top box that will be a casual gaming alternative to the next Xbox, The Verge has reported.
According to that publication's sources, Microsoft plans to release the box as a low-cost alternative to its next Xbox console.
The company's full two-SKU strategy will allegedly be unveiled in 2013, and will release before the year is out.
The set-top box is said to run on Windows 8, and will be more of a casual gaming machine that seeks to complement the full Xbox console experience.
The "always on" device will boot quickly and act as an entertainment services hub.
Microsoft is also rumoured to be investigating ways to make Xbox Live run on phones as well as TVs with no console present.
"Xbox 360 has found new ways to extend the console lifecycle by introducing controller-free experiences with Kinect and re-inventing the console with a new dashboard and new entertainment content partnerships," Microsoft told The Verge.
"We are always thinking about what is next for our platform and how to continue to defy the lifecycle convention."
In related news, Microsoft VP of interactive entertainment Phil Harrison has told a London Games Conference crowd that his company is no longer just competing with other console manufacturers.
"We are now really a multiplatform studio," he said.
"We are not just building games for Xbox 360, we're building experiences for smart glass, we're building dedicated games for Windows Phone 8 and for Windows 8."
"We think this expands our competitive map. We're no longer just competing with the traditional console companies, but our competitive landscape includes the likes of Google, the likes of Amazon, it includes obviously the likes of Apple."