Number of PC's sold makes consoles look niche. Quit making consoles?

Sorry if you think it was defensive! I just wanted to state that niche isn't bad! It wasn't my intention to imply you said that niche is something bad!

Microsoft making a handheld will result in a Steve Balmer suicide note.

The problem is that betweeen the 3DS and the Vita, there's not much room for another handheld in the market, and Microsoft would have no titles to push it with. Microsoft would basically be making a gaming smartphone: it wouldn't have that many games, but it's smartphone functionality would be it's selling point.

First, smart phones have at most a two year market life--usually less--while developers and gamers expect five to seven from a console. Second, Sony already did that with the Xperia Play. It bombed even worse than the Vita.

not as mucha s you might think if quality first party arrives on the handheld.

You bringing market leader's sales into this doesn't changes much. Companies have limited amount of resources and have to consider opportunity cost of their time and cash resources before getting into these ventures. The market for dedicated gaming handhelds has been on a decline for quite some time. 

Release a new dedicated handheld competitor into the market to chip away at the already-shrinking 3DS and Vita market?

No one at Microsoft who wants to make money is going to do that.

PS Vita is like, proof that a powerful handheld game device is just not enough anymore. You have to have amazing games, and not just ports or portable versions of console series with watered-down graphics.

The only reason 3DS isn't doing just as bad as Vita in the current climate is because Nintendo dropped price by a third less than six months after release, which is totally unheard of, and they've been releasing a steady stream of AAA sequels, to the detriment of their ability to release enough Wii U games.

MS should focus on integrating is OS's for compatibility rather than releasing another platform. Especially since they could more readily add usage of the X1/360 controller to their other devices.

Nah.
We already have smart phones. Apple has their IOS game line up, Android phones have there own. Don't forget Windows Phone (which my wife has) and we have plenty of mobile gaming already.

It's already bad enough with the Vita and 3DS on the market. I honestly wish it was just the 3DS left on the market, because with tablets and smart phones there are plenty of portable gaming options.

Between PC, Console, Tablet, Phones and Hand Held gaming I have enough games to last me till the day I die.

If microsoft makes a handheld they should at least put one more banjo-kazooie and/or Conker game on 3DS