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Is This Microsoft's Secret Weapon?

The game's apparently afoot at Microsoft (Nasdaq: MSFT  ) .

Video game enthusiast website IGN is reporting that the world's largest software company will be releasing its next generation of gaming consoles in October or November of next year.

The Xbox 720 -- following in the footsteps of the original Xbox and the current Xbox 360 -- will naturally pack superior specs. "Sources close to the project" tell IGN that the console will feature an AMD (NYSE: AMD  ) Radeon chip, giving the console six times the raw graphics processing power of the Xbox 360 -- and yield 20% greater performance than Nintendo's (OTC: NTDOY) Wii U that's set to hit the market as early as this year.

Obviously the console battle isn't won on spec sheets alone. Nintendo's Wii was a hit at its launch despite lacking the sheer gaming horsepower of the pricier Xbox 360 and Sony's (NYSE: SNE  ) PlayStation 3. The infectious motion-based Wii controller redefined the gaming experience, and that was good enough until Sony and Microsoft rolled out motion-based systems of their own.

Armed with the fall 2010 release of the camera-based Kinect controller, Microsoft's Xbox 360 regained its lead to be the top seller of 2011.

Unfortunately for all three companies, the gaming revolution is running low on fuel. Media tracker NPD Group's data reveal that industry sales plunged 21% last month, weighed down by a stunning 28% plunge in hardware sales.

Microsoft has largely bucked the malaise. The 15% surge in revenue for Microsoft's Xbox business in its latest quarter made it the company's fastest grower among its five divisions.

Microsoft isn't making the news official, and understandably so. If we're talking about a system that won't be hitting the market until just before the 2013 holiday shopping season, the last thing that Mr. Softy wants to do is dry up Xbox 360 sales between now and then.

The industry could use the infusion of fresh hardware, though skeptics will wonder if the appetite for $60 video games and dedicated consoles has dried up outside of diehard gamers. Zynga (Nasdaq: ZNGA  ) recently hit the market with a $7 billion market cap, and all it does is create casual and social games that are played entirely online.

Diehard gamers will naturally scoff at the mainstream audiences that seem complacent with Mafia Wars 2 or downloading $0.99 smartphone and tablet apps. However, outside of select blockbuster titles, the video game industry has been in a general state of decline for three years.

The one to watch now will be Sony. The Japanese consumer electronics giant overplayed its hand with the handheld PlayStation Vita in its home country last month, and there's no way that thing sells here at its $250 price point. On the console front, Sony's PS3 appears to be the odd console out. Sony needs a PS4 launch far more than Microsoft needs an Xbox 720.

However, it may be to the advantage of both Sony and Microsoft to see if the Wii U raises the bar of expectations again with its touchscreen controllers. Sony is on the verge of being marginalized out of the gaming market if it doesn't get the PS4 right and Microsoft doesn't relinquish the lead that it and its army of 40 million Xbox Live users have built.

This year may be all about Windows Phone and Windows 8 for Microsoft, but next year it's going to be "game on" for Mr. Softy.

I've been covering Microsoft since the 1990s, and I've generally had a lukewarm opinion as an investor. However, I entered a bullish CAPScall on Microsoft in Motley Fool CAPS earlier this month, reversing my earlier bearish pick.

If you haven't read about the two words that are giving Bill Gates and Steve Ballmer fits, now's your chance. The report is free so you may as well check it out now.

The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Nintendo and Microsoft. Motley Fool newsletter services have also recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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