From the late '80s through 2010, Nintendo (OTC: NTDOY ) all but owned the handheld video game market. Sony (NYSE: SNE ) emerged as a second-place contender when it introduced the PlayStation Portable in 2005. Meanwhile, Apple (NASDAQ: AAPL ) is the new kid on the block -- the threat that no one saw coming. Microsoft (NASDAQ: MSFT ), on the other hand, is a sleeping giant. The company has been quietly sitting on a number of successful franchises, including Halo, Forza, Fable and Gears of War. Those and other key properties have appeared on Xbox and Xbox 360. Some of them have also come to the Windows platform. But Microsoft has yet to develop or publish a true handheld version of these games.
By developing its own handheld game system (or tablet, depending on how Microsoft chooses to market the device), the company would finally be given a portable outlet for these and other major franchises.
According to The Verge , "Multiple sources familiar with plans within Redmond have confirmed" that Microsoft is planning an Xbox version of the Surface tablet.
"The Xbox Surface will likely include a custom ARM processor and high-bandwidth RAM designed specifically for gaming tasks," The Verge speculates. "We're told these specifications could be altered to accommodate an unannounced Intel (NASDAQ: INTC ) SoC and that the Xbox Surface is being developed independent of specific hardware architecture. Microsoft's Xbox Surface won't run a full version of Windows, rather this 7-inch tablet will run a custom Windows kernel. Messaging and other tablet functions may be supported, but the focus is on gaming."
Microsoft expressed its interest in the tablet space last June when it unveiled Xbox SmartGlass . The new interface allows Xbox 360 users to interact with the console using a smartphone or tablet from virtually any manufacturer.
Two weeks later Microsoft announced its plans for a major press event. No one knew exactly what the company had in store, but rumors indicated that Microsoft was building an Xbox-branded tablet . Other rumors suggested that the tablet may be developed in conjunction with Barnes & Noble (NYSE: BKS ), but those rumors were quickly debunked .
The resulting tablet, Surface, did not contain the Xbox name. In fact, gaming has been mysteriously absent from the Surface marketing blitz, which focuses on videos, Web surfing, the unique user interface and the ability to turn an image into a password.
This might be part of Microsoft's long-term strategy -- to sell Surface to students, business users and regular Joes, and to sell its unconfirmed Xbox tablet to gamers.
By building a tablet specifically for gaming, Microsoft has the opportunity to reach an audience that goes well beyond its existing customer base. According to VGChartz , Microsoft has sold roughly 70 million Xbox 360 units worldwide. This is in addition to the 97 million Wii systems and the 67 million PlayStation 3 consoles that have already been sold.
During the last generation of game consoles, the Xbox 360 was the first new machine to arrive. It shipped a full 12 months ahead of Wii and PlayStation 3, but they still managed to take more than 2/3 of the global market.
The handheld space is much different. As of this writing, 21 million people have purchased the Nintendo 3DS. Sony's new handheld, PS Vita, has sold a little more than three million units.
During the last generation, the Nintendo DS sold a whopping 152 million units. PlayStation Portable sold more than 75 million units.
This suggests that the global handheld gaming market includes more than 200 million consumers. While some would argue that Apple and Google (NASDAQ: GOOG ) have reduced that market by redirecting consumers to smartphones, the proof will be in the pudding. Thus far, consumers have not liked what Sony and Nintendo have offered. They balked at the high prices and weak game selection .
At the same time, Android and iOS gamers remain underserved. iPhone users may be able to play a thousand versions of Angry Birds, but that does not make up for the fact that iOS devices lack the capacity to power a full gaming experience. The same can be said for Android smartphones and tablets. Microsoft has an opportunity to change that by building a handheld device that is on par with the current Xbox.
Raw horsepower is not enough to sell a device, however. PS Vita is proof of that. It contains a gorgeous, five-inch screen and one of the most powerful graphics processors available, but its game lineup has yet to justify the $249 price tag. That may change in 2013, but by then it could be too late for Sony.
Microsoft must be careful in how it chooses to price its portable gaming device. If the price falls somewhere in the $200 to $300 range, it will need to launch with several popular franchises. Halo alone could move mountains, but it is not enough.
At seven inches, Microsoft cannot get away with charging $500. But if it has enough popular games, the company could match the iPad Mini's MSRP of $329. Content -- gaming content -- is key.
Buttons are another important and differentiating factor. Without them, games will be limited by what developers can do with a touch screen. When developers are creative, the touch screen can be an effective control option. But for most advanced games (particularly those that sell well on Xbox 360), buttons are a must.
Nintendo has the right idea with its newest console , Wii U. The Wii U gamepad includes both a touch screen and a series of buttons, just like the Nintendo DS and 3DS. But unlike Nintendo's handheld systems, the Wii U gamepad is more like a tablet. The screen is wider and includes a stylus. It is tethered to the Wii U console, however, so consumers cannot use it as a handheld device.
Aside from that last tidbit (which may confuse consumers), Microsoft has a lot to learn from Nintendo's creation.
Follow me @LouisBedigianBZ
(c) 2012 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.