According to The Verge, the device will be a low-cost alternative to its Xbox console designed to provide access to entertainment services (such as movies and apps such as Netflix) as well as run Xbox app-like games. The device will run Windows 8 and support casual gaming titles, rather than the full games from the Xbox.
The device could potentially use Microsoft's Kinnect-style interactivity to also provide a unique motion interface. Apple is rumoured to be implementing a new type of interface with its Apple Televsion.
It has long been mooted that Apple may take its App Store offering to the Apple TV, and enable the Apple TV to run the kind of software variety that is found on iOS devices.
Microsoft told The Verge: "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. We are always thinking about what is next for our platform and how to continue to defy the lifecycle convention."