The upgraded hardware part, no way. Thats never been done in consoles and never will, you dont understand the console market at all if you think otherwise.
The times anything like that has been attempted (32x) it ended consoles.
The Natal packed in part..maybe. If they want it to be really big it probably will need to be packed in.
The whole rumor is just really confusing on so many levels and makes my head hurt. And even better, we wont get confirmation/repudiation according to the rumor's timeline one way or another for almost a year, just to make the rumor more annoying.
The one weird thing is we havent heard a peep about MS next console, Not even any general clues. Where we've actually heard a lot more about PS4 (lots of Larabee rumors).
But I thought a very good knock on the rumor's credibility was mentioned at GAF, which is that it mentions WiiHD, which again anybody who understands the console market knows doesnt exist, as Nintendo has less than zero reason to introduce such a thing. So that doesnt speak well for credibility.
The only way I think this rumor has a wild shot of being true is if MS looked at the terrible pace process shrinks are progressing, and will progress in the 10 years, and basically thinks advancing hardware is done.
What I mean is in 3.5 years of 360 it's had 1 process shrink, and that was like pulling teeth. It's not going to get better next gen.