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For a while it wasn’t known whether or not the Xbox 360 would allow for backwards compatibility, but after E3 we learned that the major titles would work on the next-gen console. Some further details have been released explaining some of the complications associated with backwards compatibility.

In a separate meeting with Microsoft management, we confirmed that the company has agreed to pay a small royalty to Nvidia to allow the Xbox 360’s ATI chipset to emulate the performance of the Nvidia chipset in reading certain Xbox games. For games written in a single layer
(management assumes that this is a large percentage of Xbox games), the hardware emulation should perform well.

For games written in multiple layers, a further emulation must be provided. The company intends to create software “patches” (i.e., separate emulation programs) for top-selling Xbox games written in multiple layers, and intends to sell the Xbox 360 with a hard drive that is pre-loaded with these patches. We presume that the majority of Xbox games will be backward compatible, and the company assured us that it intends to add patches should consumer demand warrant such action.

I definitely never expected that Microsoft would have to pay Nvidia a royalty fee for emulating. And it sucks to see that this will require software patches.