In an effort to compete with Sony’s Blu-ray-enabled PS3, Microsoft is releasing an XBox 360 HD-DVD player peripheral for about $200, about $200-300 less than similar HD DVD players. Most of the the high-end audio and video processing will happen on the XBox itself, which means the drive will be essentially a “dumb” device designed simply to read HD DVD format disks.

Microsoft’s Major Nelson aka Larry Hryb, Microsoft’s director of programming for Xbox Live, said:

Here’s the truth, we’re still thinking about it. Here’s what I can tell you for sure; it’s going to be the cheapest HD DVD player you can buy without a doubt, when it comes out. I think it’s going to be a great value… Everybody is very enthusiastic with the direction we’re going. There’s still a few surprises left. And I don’t want to spill the beans yet, but I think people are going to think it’s a great value.

If those surprises are HD DVD-based games, expect some extremely interesting in-game video along with some potential “enchanced” games using the increased storage capacity of HD DVDs, which can hold up to 30GB in dual-layer format.

MS: Xbox 360 HD DVD Player to be Cheapest on Market [Gamedaily via DailyTech]