'low end' sku is your terminology. I said consumer sku. Microsoft wants to compete with Apple/Google for the living room, you're right. Which means gaming takes a back seat, which to me, seems exactly what has happened with the recent specs if legitimate. To me, it seems like they are taking a 'good enough' approach. Granted again, my technology knowledge is basic at best.
That is exactly the thinking which has led to Apple TV and Google TV (the two mentioned set top box competitors) basically having little to no success. They are a set top box first with gaming taking a back seat.
Microsoft is approaching it from another direction entirely. Depending on how someone wants to think of it. It is either...
[1] Gaming and set top box functionality share equal importance.
or
[2] Gaming is still the top priority but set top box functionality is a very close second.
In either case, gaming doesn't take a backseat because gaming is the biggest potential game changer in attempting to create mass consumer adoption of a set top box ecosystem.
You can think of it in another way.
You use Xbox and console gaming combined with an advanced and well polished living room media and application experience. It's enough to get people to jump in on a set top box experience because they aren't limited to just a set top box experience with crappy games.
Now, those people, just like with Kinect, will want to show it off to their friends, assuming they did a good job with the non-gaming aspect. That might convince some more people to get the Xbox, but that isn't the point.
The point is that it'll hook some people that in the past have been unsatisfied with Apple TV, Google TV, or any other of the plentiful Linux/Windows set top boxes. Or have never tried a set top box. But they may not be gamers, and may not be interested in the gaming experience and think why pay so much money?
That's when 6 - 12 months later it'll be an opportune moment for Microsoft to release a set top box without the gaming functionality assuming they did a good job with that functionality in the Xbox.
IMO, that's a much more likely scenario for how Microsoft intends to approach the set top box market.
In many ways you can think of this as similar to the PS2 and PS3. In those cases the console was a medium to drive adoption of DVD and BluRay, but gaming never took a back seat to those things even though in the case of PS3 it likely impacted design decisions (cheaper RSX versus a more proficient GPU, for example). While Durango won't be trying to drive adoption of some optical media, it could be attempting to drive adoption of Microsoft backed set top boxes of the future.
That set top box without the console gaming bit (it'll likely still have the casual game app type stuff you can find in the Microsoft, iOS, Android marketplace) could bear the Xbox branding as well. Which fits in nicely with the rumors of multiple Xbox branded devices. Similar in many ways to how Zune was re-envisioned as Xbox Music. There's also the possibility, however small, of an Xbox branded Windows HTPC with the same set top box UI combined with the ability to play proper PC games. I find the last pretty unlikely but it would be neat if it happened, IMO.
Regards,
SB