Engadget has some leaked pictures of what is being called the XBox 360 Zephyr, which has an HDMI port right on the box.  They are also reporting that this next revision of the XBox 360 will come with a newer 65nm processor and a 120GB hard drive. HDMI is the latest and best digital audio and video connection, and theoretically provides the best high-def picture quality you can get from the system.  Image quality alone is enough to want HDMI on your XBox.  What most people probably aren’t as aware of however is that HDMI provides content encryption, whereas component, VGA, svideo, etc do not.
This content protection has been one of my primary concerns with the current revision of the XBox when measured against many of the newer initiatives that are related to the Xbox.  To spell it out for you:

Fact #1:  HD-DVD, HD content from a media center running cablecard, and potentially HD movie downloads all have the requirement to run in a completely protected system.  That means that in order to get the full resolution picture, every component along the way needs to be encrypted.  For the time being, this requirement is turned off for movies.

Fact #2:  Microsoft has not announced any sort of encrypted high-definition output for the XBox 360.

Fact #3:  Microsoft is selling accessories and services that require encryption.

Add these facts together and it’s pretty clear that there is an issue.  All that high-definition content that you can get for the Xbox 360 simply will not work in the very near future unless something changes quickly.  And while there has been a reprieve announced for HD movies, the same reprieve has not been announced for Media Centers that use cablecards to get high-definition cable signals into the box.  And here lies the biggest issue of them all - if you have a media center PC that uses cablecard, will you be able to use the Xbox 360 as an extender or not?  Unless there is a change to either the policy relaxing the encryption requirement, or a change to the XBox 360 to allow encrypted output then for now it looks like these users will be SOL.

So what will that change be?  Some are hoping for an HDMI add-on cable for the 360, others believe that HDMI requires enough new hardware that it will require a new revision of the XBox.  This leak certainly seems to point to the latter, but hopefully we’ll find out next week with some announcements at CES next week.  No need to get too concerned, MCE Vista isn’t even for sale yet, but it is interesting.