Most of us woke up to some pretty interesting news this morning. According to sources close to reputable gaming site 1UP, Microsoft may be planning a new console launch, rebranded and bundled with Natal, in late 2010. After I saw Natal and read Shane Kim respond in an interview with Kotaku “conceptually, the launch of Natal will be like the launch of Xbox 360″, it seemed like something more than a new SKU was on the cards.

Aside from the business sense of launching a smaller Xbox 360 with a brand designed specifically to dent Nintendi’s marketshare, there are signs that point to plausability. Those who follow hardware rumours in the games industry will likely have heard of the Xbox 360 Valhalla chipset – while not exactly confirmed, the chipset is rumoured to combine the existing 65nm CPU and 65nm GPU chipsets, reducing not just the cost of Xbox 360 production but potentially the amount of space required inside the console’s housing. Valhalla is pegged for availability in 2010.

1UP also mention that the console will see a rebrand – Xbox Natal obviously springs to mind – but this raises other questions. If Microsoft chose to slimline the console, rebrand the unit and bundle it with Natal, it could be a significant marketing win, but there’s some speculation that the console would include new hardware architecture. If Microsoft splinters the Xbox 360 install base without making a true technological leap we’d expect in a traditional console cycle, that feels like a mistake. Mind you, new hardware architecture doesn’t seem to gel with the way Microsoft has spoken about platform lonjevity in recent months, and it’s important to remember Xbox Natal will be available for all existing Xbox 360s.

Interesting times – the question is, will Nintendo beat Microsoft to the punch with the long-rumoured, oft-denied Wii HD? Remember, Nintendo famously denied the existence of the DS Lite days before its unveiling…