We know Microsoft has been interested in developing a streaming service for many years. At this year's E3, the company reaffirmed that it's working on a streaming service that will allow games to be run in the Azure cloud and streamed to a relatively simple set-top box. This makes the end-user hardware much cheaper, but it has a consistent problem: latency. Every button press on the controller has to travel over the Internet to the server before it can be processed, and every frame of video similarly has to make the reverse trip before it can be seen. For games that don't rely on twitch reactions (RPGs or turn-based games, say) this is no big deal. But for games like first-person shooters, it's a huge problem.
According to Sams, Microsoft's solution is that the Scarlett Cloud box (as one person called it) will have some amount of processing power of its own. Not enough to run full games, but enough to do collision detection, input handling, and some amount of graphical processing locally without having to wait for the remote server. To do this, games are split into two parts (referred to as "slices" or "splices")—one part runs in the cloud; the other runs on the console.