The Diffusion Group predicts Microsoft may develop a portable game console, in the mold of Sony's PlayStation Portable and Nintendo's DS, by late 2007 or early 2008. The aim would be to mobilize the company's Xbox franchise. Microsoft has been evaluating two options regarding its portable gaming strategy: licensing a version of its Xbox OS for others to build portable hardware designs upon, or introducing its own branded PGC, according to the research firm. It did not say how it knew this.

Portable media analyst for the The Diffusion Group, Thomas Wolf, said, "With global portable game console revenues expected to reach $3 billion annually by 2008, and with only Sony and Nintendo active in the portable game console space, Microsoft has before it an incredible opportunity. It has a critical brand presence in the console space, the breadth and depth of gaming titles, and the marketing clout necessary to enter this space and win decent market share."

The report goes on to say that that while licensing Xbox software to others is consistent with Microsoft's larger strategy, The Diffusion Group's CEO Michael Greeson thinks because "Microsoft owns an established and highly-regarded hardware brand, means that they can enter the portable game console market from a position of strength, a privilege not enjoyed by any other player except those already active in the portable game console space."

Last month, Microsoft introduced Live Anywhere, which intends to deliver the Xbox Live experience to the desktop and cell phones (Windows Mobile, but Java and BREW-enabled handsets as well). With Xbox Live, gamers from all over the globe can play each other, chat, try and download new games, etc.

Microsoft released the original Xbox in 2001. It debuted the latest edition, a high-definition version, Xbox 360, last November. About 10 million Xbox 360 units have shipped since then. Rivals Sony and Nintendo have yet to release their next-generation consoles.

In a recent interview with diewelt.de, a German site, Microsoft CEO Steve Ballmer said the company would be open to creating additional hardware under its own name, including PDAs and smartphones.

Creating a mobile Xbox is one thing, there are no other Xbox vendors other than Microsoft itself, but a handheld could raise the ire of its Windows Mobile licensees.

Devices built on the platform have been taking up an ever larger share of the mobile market. Perhaps the software giant shouldn't do anything to shake the confidence of those manufacturers already developing PDAs and smartphones on the OS, especially the many smaller, but very successful original design manufacturers, like High Tech Computer (HTC).

HTC is the company that built Compaq's early iPAQs, the first really successful Microsoft-based handhelds. It also built the first Windows smartphones and is responsible for more Pocket PC Phones and Windows smartphones - 80 percent - than any other ODM.