According to a Bloomberg report, which cites people familiar with the company's plans, Microsoft will roll out a new Xbox in time for the 2013 holiday shopping season. Bloomberg wasn't clear on whether Microsoft would take the cover off a new Xbox at an industry event like the E3 show in June or hold a Microsoft event to promote the console.

"The new version will debut a year after Nintendo Co.'s brand-new Wii U, which went on sale Nov. 18 in the U.S.," Bloomberg reported. "Sony Corp. is also readying an update to its PlayStation console. In the meantime, Microsoft is still trying to squeeze out sales of the current model Xbox 360, selling 750,000 over the week around Thanksgiving, surpassing company expectations."

Video Game Sales Dipping

According to NPD Group, video game hardware and software sales, as well as accessories, are declining. Specifically, sales dropped 25 percent year-over-year in October to $755.5 million. Microsoft has led the market in the U.S. for the past 22 months, but its sales are trending down.

Rob Enderle, principal analyst at the Enderle Group, told us the technology on the Xbox is almost a decade old and it's well past time to do a major refresh on this product.

"One of the problems with the overall market is that vendors are cycling the consoles too slowly and so the market loses interest," Enderle said. "Clearly for all of the game systems have dropped off a bit, but the Wii U is trending at the moment. The refresh brings excitement back to the product."

PlayStation's Peril

Microsoft's impending Xbox 360 update puts more pressure on Sony's PlayStation. Sony has offered some cosmetic updates and some cost reductions, actually cutting some features out to drive down prices. But it hasn't spurred strong growth.

"PlayStation 3 was what cost Sony the gaming market. It was priced out of market and they never really recovered from dropping from first to third place surprisingly rapidly," Enderle said. "Xbox updated, before the PlayStation 3 came out, with the 360. I don't think Sony is going to let that happen again. If both the Wii and the Xbox are updated again before a PlayStation update I think Sony is going to find themselves without a market."

Microsoft's Strong Ecosystem

The momentum is surely on Microsoft's side. Microsoft's Kinect motion-and-voice controller was a hot seller and the company is rumored to be building an Xbox Surface. An Xbox Music service is also coming down the pike in early 2013.

"The Wii was a different product, playing more for casual gamers, away from the core gaming groups that buy the PlayStation or the Xbox. Since then, the Xbox has done a better job of embracing the Wii's market with Kinect," Enderle said.

"Microsoft is the one to beat. They've got the better ecosystem now, particularly when you talk about the connectivity between all the products. You've got the coming Xbox handheld gaming system. Xbox would be a player in the tablet space. Microsoft has far more resources now."