It's not a matter of a business choice, it's the fact that the hardware is incompatible.
The X-Box 2 is using a PowerPC G5 RISC (reduced instruction set chip). The X-Box used a Pentium III CISC (complex instruction set chip). That's the dinger right there, to get anything based on a CISC to run on a RISC, or vice versa, requires a whole crapload of reverse programming. Even so, it's still extremely inefficient. For example, Mac OSX runs at about 5% speed in emultion on a PC, and Windows runs at about 50% speed on a Mac.
And yes, they expect you to buy another whole new console. People with X-Box games generally have the X-Box to go with it, it won't automatically stop working once they get the next one along.
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"'There's a tendency among the press to attribute the creation of a game to a single person,' says Warren Spector, creator of Thief and Deus Ex."
-- From an IGN game review.
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