"Here's a story that came from reporting for my book, which is coming out in May under the title "The Xbox 360 Uncloaked: The Real Story Behind Microsoft's Next-Generation Video Game Console," www.spiderworks.com/xbox360. In a bid to capture the huge audience for handheld entertainment gadgets, Microsoft is designing a product that combines video games, music and video in one handheld device, according to sources familiar with the project. The Microsoft product would compete with Sony, Nintendo and Apple Computer's products,ncluding the iPod. And Microsoft has some of its most seasoned talent from the division that created its popular Xbox 360 working on it. Game executive J Allard leads the project, and its director is Greg Gibson, who was the system designer on the Xbox 360 video game console. Bryan Lee, the finance chief on the Xbox business, is leading the business side of the project. By anchoring its entertainment device as a handheld game player, Microsoft is starting from its position of strength in the entertainment business that it hopes Apple cannot match, even with its iPod. The game press has dubbed it an "iPod killer,'' but its functions would likely more closely resemble Sony's PlayStation Portable multimedia gaming device. While details are sketchy, the pedigree of the people in charge of the business show how strategic it is to Microsoft's future. "That would certainly be an interesting development in the market,'' said Anita Frazier, a game industry analyst at the NPD Group. The other competitors have huge leads on Microsoft. But the Xbox veterans have been underdogs for a while. Gibson, 35, is an electrical engineer who joined Microsoft in 1997 to help design computer mice and other hardware. He shifted to the Xbox division in 1999 to help design the innards of the original Xbox. In 2002, he became the system designer in charge of the overall design of the Xbox 360. Allard, a 36-year-old progammer who became famous for prompting Bill Gates to take the Internet seriously, commanded much of the hardware and software teams who put together the Xbox 360. Lee, a longtime entertainment executive, joined Microsoft as finance chief for the Xbox a few years ago. The approval of the project spurred the reorganization of the leadership team in the Home and Entertainment Division in December. In September, Robbie Bach, formerly the chief Xbox officer, was promoted to lead the Entertainment and Devices Group, which combined the Xbox with other mobile and entertainment businesses in one of four major product groups. Then in December, the jobs of the top Xbox executives were broadened so that they could manage all of the businesses related to the broader Entertainment and Devices Group, which included the Xbox business, mobile devices, MSN, music, and home productivity software. Allard, whose group designed the Xbox 360, was named to head "experience and design'' for the entire group. Sources say that the reason for the reorganization was to bring Allard, Lee, Gibson and all of the relevant businesses into a single group, which is supervised by Robbie Bach. The participation of these highly regarded Xbox veterans suggests that Microsoft is very serious about catching up with Sony's PlayStation Portable handheld game player, Apple's iPod music players, and Nintendo's handheld GameBoy Advance and Nintendo DS game players. In the past, all of Microsoft's efforts to compete have fallen short. The company considered making an ""Xboy'' game player a few years ago but shelved the idea. It considered making a game handheld at the same time it devised plans for the Xbox 360 in 2002 and 2003, but it again decided to delay its entry. Meanwhile, Microsoft's efforts in PocketPC handhelds and Portable Media Players have fallen short in competition with the iPod. Last week, Microsoft unveiled Project Origami, a handheld Windows computer. But that device isn't targeted on pure entertainment as the Xplayer is. The existence of these other projects suggests that there is still some infighting within Microsoft about its best approach to portable gadgets. The handheld project is still in its early stages. Microsoft is still figuring out which strategy to pursue in music technology, according to sources familiar with the matter. The code name for its music service, which would be the equivalent of Apple's iTunes, is "Alexandria.'' One benefit of waiting longer is that the handheld will likely have sufficient technology in it to run a lot of original Xbox games from a few years ago. Hence, it wouldn't be hard to create a new library of games for the handheld. Signs of activity have surfaced. Transmeta, a maker of low-power chip technology, said last year that it had assigned 30 engineers to work with Microsoft on a secret project. Transmeta's engineers work on ways to take the power out of computing chips so that they can be used in handheld devices with long battery lives. In an interview with Business Week in January, Xbox corporate vice president Peter Moore said "it can't just be our version of the iPod'' and added the Xbox brand "is an opportunity'' if Microsoft decides to enter the mobile entertainment competition. He declined to comment on the rumor about the handheld. But sources familiar with the project confirmed its existence within the Xbox organization. What remains to be seen is when Microsoft will launch the device. Gibson may not need a large engineering team to run the project. But his group of hardware engineers only became free last fall, when most work on the Xbox 360 was completed. It could be 2007 before the device hits store shelves. That gives rivals such as Sony, Nintendo and Apple considerable time to consolidate their position and come up with their own new gadgets in the meantime. Obviously its too soon to actually talk about its potential, but as it stands right now I can't see it doing too well. The PlayStation brand has become synonmous with gaming as Nintendo was previously, and the latter now more popular in hand-held gaming more so than consoles. I can't see it doing well judging from the current sitatuation. It'll really have to be something special.