If this is true, then brace yourselves third-party developers. Cause Piracy is going to fuck you up, if you choose Microsoft. I mean seriously, Windows is not really known for it's good protection against piracy, and pretty much the only thing stopping this for the Xbox is that you have to hack the console itself to play pirated copies. Now they're just going to put Windows on the Xbox, and everyone can just start up a hacked copy of the game. And 'god' knows DRM won't help!
Sure the idea sounds cool, and practical of course, probably saves some money too. But I am wondering what they're going to do about the piracy. And then there's the viruses. Imagine your PC infecting your Xbox and pretty much bricking it via your home network. Also what's the point of even having a Xbox anyway, what will be the extra value over a PC, Right now its pretty much the XBLA and the games, but then it will maybe be the controller? (which can be used on a PC anyway.) I just don't really see this working, but go ahead Microsoft, prove me wrong.