According to the rumor mill, the successor to the Xbox 360 could be some sort of cloud-gaming hybrid mixing physical discs with an online service. Analysts have been busy trying to figure out Microsoft's next move.

Microsoft hinted about the cloud options coming to the next console, dubbed the Xbox 720. At E3 this year the company already announced plans to allow players to save their game progress and profiles to an online server. That is only the tip of the iceberg when compared to what cloud gaming can do.

At the Game Developers Conference in China, Microsoft cloud developer, Brian Prince, talked about what Microsoft's new Azure cloud service meant for businesses. He dropped a few hints what the company's new cloud capacity could do for gaming companies.

You will be seeing things in the Xbox platform that's cloud-specific. I'm already doing it, it's really exciting, but I can't tell you about it or else I'll get fired, Prince said to the crowd.

He said there were a few options games developers could take when considering cloud gaming. They could develop games and apps to scale and put them up on the cloud internally, or they could push already-existing games to other streaming services such as OnLive or Gaikai.  

Though Price is excited by the possibilities, he said there are a few problems with these types of services that need to be ironed out:

Typically these platforms focus on AAA PC game titles. If you're not in that space, they don't want to talk to you as much. Another problem is that your gamers need high speed internet access. That's fine if you live in a city, but most of America doesn't live in a city, for example.

Experts think that the Xbox 720 won't be a completely cloud-based experience, but more of a transitional console bridging the gap between the physical-disc present and the cloud-gaming future.

I don't expect vendors to leave physical media formats out of next generation consoles. Gaikai and OnLive are viable game delivery systems but in the near term cloud gaming services can't yet allow access on a scale to realize their inherent disruptive potential, Billy Pidgeon, an analyst for M2 Research, said to Industry Gamers. If Nintendo and Sony do not follow Microsoft's lead here, it will cost them market share next generation.

Microsoft has already found a lot of success with digital distribution models with its Xbox Live Arcade service. XBLA already offers indie games from small developers for $15 to $20. The service has produced some hit games such as the platformer Splosion Man, or action role playing game, Bastion. The Arcade even offers some blockbuster games a few months after they hit store shelves, but the huge data requirements quickly fill up Xbox 360 hard drives.

Microsoft can't completely abandon physical products because retailers such as Gamestop are deeply engrained into the game industry and gamers aren't yet ready to embrace fully digital gaming.

The digital transition will be just that, a transition, and neither Microsoft nor Sony will force consumers to go 100% digital, Jesse Divnich, an EEDAR analyst, told Industry Gamers. I'd expect the Xbox 720, or whatever they choose to call it, will act as a true hybrid console, supporting both physical and digital media with the long-term hopes that they can provide enough incentive and value to accelerate that transition.