"It makes perfect sense for Microsoft to enter the portable gaming market by 2008," said Thomas Wolf, TDG analyst and co-author of the report. "There's no point in the past 15 years where the industry has sustained this type of competition we're seeing today, and Microsoft has the brand power and marketing budget to pull it off."
By 2008, the XBox 360 will have several "solid" years to penetrate the market, which would give Microsoft additional "power," Wolf said.
And despite repeated denials from Microsoft (the vendor did not respond to requests for interviews about the TDG report), analysts consider the possibility real and necessary to compete in the game market.
"Microsoft has thought about it, but the ultimate decision isn't conclusive," said Lazard Capital Markets LLC senior research analyst Colin Sebastian. "Strategically, they would enter the market for several reasons."
For one, Microsoft needs to compete against rivals Sony PSP and Nintendo DS and Gameboy product lines. Second, the majority of profits come from software sales, analysts said. A handheld device could boost overall profits for software sales and in-game advertising, putting Microsoft's recent acquisition of video game advertiser Massive Inc. to good use.
Lazard Capital estimates U.S. game software sales for Sony PSP at $546 million in 2006, up from $420 million last year. Nintendo DS should reach $375 million, up from $258 million; compared with Nintendo Gameboy Advance to reach $783, up from $744 million. Notably missing, Microsoft.
"The manufacturers typically take a loss on the hardware, but get a nice royalty on each piece of software," Sebastian said. "The console makers want to get more hardware into the market to drive software sales."
Consumers also have warmed up to mobile devices from cellular phones to music on MP3 players, such as video iPods. Although pure conjecture, Sebastian said, the handheld gaming device would most likely act as a complete media center with music, video streaming and Internet access.
But the move would require a sizable investment. Software game developers would need to work from new development kits and specifications for the device, analysts said. "It would be difficult and expensive project," said Evan Wilson, senior research analyst at equity research firm Pacific Crest Securities. "It's not something Microsoft hasn't done before, so they would need to launch a whole new video game platform."
Initially, Microsoft would likely take a financial hit on the product as they build a network to sell software into. That's the path Microsoft took with the XBox and the XBox 360 consoles. "Microsoft has been working on turning a profit since 2001, and they've only now begun to see success now," Wilson said.
