Microsoft’s next generation Xbox may not be the entertainment hub of the living room that the Xbox 360 is slowly morphing into. That’s because Redmond is planning to take those features and build a dedicated set-top box for streaming video over the Internet according to sources familiar with the matter as first reported by The Wall Street Journal.

The news may seem a bit puzzling at first as Microsoft has worked extremely hard to develop the Xbox 360 into what it is today – a very capable media system that also happens to play games. But the more you think about a dedicated set-top box, the more it makes sense. Let me explain.

Today’s Xbox can be had for between $199 and $299 – a solid deal for a game console but a bit pricey for someone that just wants a media center. That’s especially true when you consider similar devices from the competition typically start around $100. Microsoft could easily carry on with transforming the Xbox into a media hub but with the new (and likely much more expensive) Xbox on the horizon, doing so would leave a number of budget-minded consumers out in the cold.

So why did Microsoft spend so much time turning the 360 into a media hub? Perhaps they wanted to see if there was a market for streaming media or perhaps the Xbox simply served as a live beta test for a dedicated set-top box – an outlet to perfect the software aspect that could then be transplanted over to a separate device. All of this, of course, is pure speculation, but I digress.