The hype train is expecting Microsoft to show a prototype for the next Xbox at next year's E3 video game expo and a rumored release to follow in late 2013. A new insider report claims the next Xbox is codenamed "Loop" and will run a modified version of Windows 9 (not Windows 8, but 9).
MS Nerd (a source that Kotaku says has been reliable before) is stating that the next Xbox will be smaller and cheaper than the current Xbox 360 S.
"It will use a Zune HD-like hardware platform--a "main" processor with multiple dedicated assistive cores for graphics, AI, physics, sound, networking, encryption and sensors. It will be custom designed by Microsoft and two partners based on the ARM architecture. It will be cheaper than the 360, further enabling Kinect adoption. And it will be far smaller than the 360. It will also demonstrate how Windows Phone could possible implement Win9's dev platform on the lower end."
Using ARM processors doesn't seem too farfetched if you consider the power that smartphones and tablets with quad-cores can deliver. There's no mention of Microsoft building Kinect directly into the next Xbox as previously rumored, but honestly, this is all rumor fodder anyway.
Going with ARM chips could also significantly keep the system's heat down, and possibly not even require any fans.