Microsoft working on new game-media portable?

Source: The latest issue of BusinessWeek.

The official story: "We're not either confirming or denying or whatever
we generally say."--Microsoft corporate vice president Bryan Lee.

What we heard: In April 2004, an interesting rumor made the rounds.
According to the story, a tipsy J Allard, the current head of the
experiences and design division of Microsoft's gaming and entertainment
group, cornered a Whistler-Blackcomb snowboarder with tales about how
his company was readying an "iPod killer." Allard allegedly said that
Microsoft's next-generation game console would have an external hard
drive that doubled as a self-powered MP3 and media player.

But when the Xbox 360 was finally unveiled the following May, its
"outrigger" 20GB HD couldn't play media files on its own. In fact,
during presentations, Microsoft executives would show off the 360's
connectivity with the iPod and PSP, apparently quashing rumors of any
Microsoft designs on the handheld media and gaming market.

That said, many analysts believe the uber-successful iPod will
eventually force Microsoft to launch its own multimedia handheld. In
the aforementioned article, BusinessWeek reporter Jay Greene says that
the company is "working on plans to develop its own portable digital
media device to rival the iPod." Furthermore, he quotes Xbox marketing
guru Peter Moore as saying that any Microsoft portable would play
games. "It can't just be our version of the iPod," Moore told
BusinessWeek, and also hinted that said hypothetical handheld would
bear the Xbox logo. "I think the brand is an opportunity," he said.

Though BusinessWeek cites an anonymous source as the basis for its
story, there is a consensus of opinion that Microsoft will eventually
release a hybrid gaming/media portable. Such a device could incorporate
the best of both worlds: Gaming functionality would give it an edge
over the iPod; a high-capacity hard drive would trump the PSP's
limited-storage Memory Stick Duo; and multimedia functionality could
make it more attractive than the gaming-only DS (to some, anyway).

There is also the question of Microsoft's notorious competitiveness.
Currently, more than eight out of every 10 MP3 players is an iPod. The
handheld gaming market, which is expected to reach 43 million customers
by 2009, is dominated by Nintendo and Sony. It's highly unlikely that
Microsoft is just going to let those companies waltz away with their
profits unchallenged. After all, the software colossus has already paid
a high price--$7 billion in Xbox losses as of last year--just for a
piece of the console pie.

Bogus or not bogus?: Not bogus that Microsoft is exploring the
possibility of a handheld. (A company that size probably has plans for
the aftermath of an asteroid strike...)