Honey, I Shrunk the Xbox

Microsoft (NAS: MSFT) may be finally ready to compete in the portable gaming market.

Sources are telling tech blog The Verge that the software giant is building a smaller version of its Surface tablet with gaming intentions. The Xbox Surface would be a 7-inch device running a modified version of Windows and customized with gamer-centric specs.

An Xbox Surface makes sense. It would buy Microsoft time before it refreshes its gaming console in a year or two.

Is it too late for portable gaming, though?

It's been a mystery as to why Microsoft has stayed out of the handheld gaming market. Nintendo(NASDAQOTH: NTDOY) has owned this market for years, and Sony (NYS: SNE) hasn't exactly been a shrinking violet.

However, as Apple's (NAS: AAPL) iOS and Google's (NAS: GOOG) Android have gone on to sell hundreds of millions of smartphones and tablets apiece, gaming for mainstream players has taken on casual and social elements. The success of Apple's App Store and Google's own Android marketplace has opened the door for developers of all sizes to make a splash through free or nearly free diversions.

It's hard to justify springing $30 or more for a 3DS or PS Vita game these days, though the marquee releases do continue to do well.

By its very tablet-centric nature, an Xbox Surface would open itself up to cheaper games distributed digitally. That's a sound strategy, but will it be able to set itself apart from the countless other tablets on the market that already have access to hundreds of thousands of iOS and Android apps?

The one thing working in Microsoft's favor -- and it's something that it hasn't had with last month's Surface debut -- is a built-in audience of hardcore gamers that love their Xbox consoles and value their Xbox Live subscriptions. We'll see if that translates into a sizable market.

If not, the Xbox Surface can always become the "second screen" to the inevitable Xbox 720 -- just as Nintendo's new Wii U is counting on the dual-screen nature of its controller and the actual TV screen.

The game's afoot, even if Microsoft may be showing up too late to play.

Digital future
It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of the Surface, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

The article Honey, I Shrunk the Xbox originally appeared on Fool.com.

Longtime Fool contributor Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft and is short Sony and has the following options: long JAN 2013 $22.00 calls on Sony. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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