You may very well be correct but I think they have a better shot at the handheld market than they ever did with the home console. The handheld market is generally raw in comparison. Their competition is DS & PSP both of which have very few games (relative to home consoles) with the DS having a big advantage due to compatibility with the GBA. On home consoles we had a PS2 with a crapload of games, and PS1 as support as well as established big names such as Sega and Nintendo to deal with. Catching up to handhelds should much easier to do since the games are cheaper and faster to produce. The PSP especially, is very raw since its library is particulary lacking. I think the longer they wait, the harder it will become since it gives the PSP more time to establish itself like the PS2. But yes i agree. The portable needs to be in the sub $200 range, and they need to have really good games available at launch. They have deep pockets so I wont put anything past them.

I would like them to release a handheld, it would be interesting to see what they could do.  It would have to be special though and IMHO the DS and the PSP have it all wrapped up.

People keep saying this...and it's now become a bit of an urban myth (untrue at that).  The PSP has a plethora of great games catering for the entire gaming market.  MS would need to release a handheld with a truely next gen gaming experience in your hand as well as with a hugh catalogue of games for release to have any chance. 

If you like those turn-based strategy games, you can add "Lord of the Rings: Tactics", "Popolo Crois", "Yu-Gi-Oh", "Metal Gear Acid" and "Metal Gear Acid 2" to your list.  The "Metal Gear Acid"s are actually turn-based card games.  You might also like "Star Trek: Tactical Assault".  You can also import "Gundam Battle Tactics", 
which I hear is mostly in English, so it might be playable even if it is a Japanese release.  Looking into the future, you can also add "Castlevania: Dracula X Chronicles/Symphony of the Night" (yes, both games are packed together) to your PSP list.

In terms of PSP RPG's, you're missing quite a few there.  "Dungeon Siege", "Tales of Eternia", 
"Final Fantasy", "Final Fantasy II", "Legend of Heroes", "Legend of Heroes II" , "Legend of Heroes III", "Riviera", "Elder Scrolls", "Kingdom of Paradise".  There's also "Untold Legends" and "Untold Legends 2".

If you like Zelda, you can also add "Gurumin".

If you like GBA games, a modified PSP will run all the GBA games you want, as well as PS1 games 
("Final Fantasy VII", "Diablo", etc.), Genesis, MAME, NeoGeoCD, Sega Master, SNES, NES, GB/GBC.

I disagree that the screen is too small to play an FPS.  There are a lot of people out there who play FPS 
(Doom, Doom2, Hexen, Duke Nukum, Quake) on smaller screens (Palm and PocketPC PDA's) with no 
problem.  I also disagree that portables are not good for certain genres.   People say this because they associate portable with stop-go-stop short bursts of gaming, which, on the PSP, is fine because the PSP has a sleep feature.  You can pause any game and put the PSP to sleep mode (the default when you toggle the ON/OFF switch; you have to hold it for 5 seconds if you actually want to turn the system off all the way).  When you turn it on again, you're back exactly where you left off. 

Again, Microsoft already has their portable. It's called the PocketPC. All of Microsoft's consoles have run on Microsoft Windows technology. That's why it was so easy to move PC-based homebrew to the Xbox1. That's why the 360 can interact with Windows Media Center Edition.  That's why 360 games are so easily ported 
to PC.  They are all using the same technology at their cores.  A portable running Windows technology is known as a PocketPC. If Microsoft released a portable using the same recipe it uses for all its other consoles, hackers will have it converted back into a PocketPC PDA within 6 months, though it would probably lack the touchscreen and require some other form of input.

They problem is the games you listed as replacements aren't GOOD games. It doesn't really matter what genres you prefer, if you want quality in your games you have more available on the DS than on the PSP. I'm not saying there is nothing good on the PSP, but there is MUCH more available to any type of gamer on the DS. Also, the best handheld first person shooter without a doubt is Metroid Prime Hunters. It's handled much better than anything on the PSP. Oh and before I'm bitched at by Sony fanboys I do in fact own a PSP.

Not to mention there is some huge money gouging on the PSP.  To sell final fantasy 1 and 2 seperately, even with somewhat improved graphics when you can get it for less than half the price as a GBA game is ridiculous.  Also the amount of PSP RPGs to DS RPGs doesn't even compare.  The only thing the PSP has MORE of is shooters... which aren't even as good as the DS's 1.  I bought my PSP for portable GTA, but that's all that I have ever been compeled to get for it other than Mega Man and Power Stone.   The best fighter is on the DS too, though it is an import game.  Jump! Ultimate Stars blows tekken away.  It's an amazing online brawler. 

Obviously, I haven't played all of them, but those are all good PSP games according to Amazon reviewers. The only questionable ones, I think, were "Star Trek" and "Untold Legends 1", both of which got three stars on Amazon. I've actually played "Untold Legends 1", and it's really not that bad, especially considering it was a launch title.  I'd probably give it 3-1/2 stars (7 out of 10) myself. Rent a few of them and see for yourself. Or, if there's a particular game listed there that you don't like, let me know why you didn't like it. I want to go check it out and see how bad it is so that I'll know whether or not we're on the same page. If all you've tried are "Grand Theft Auto"s, "Megaman" and "Powestone", you really haven't given the 
system a chance. I agree that "Metroid Prime Hunters" for the DS is a good game, but I actually prefer the old sidescrolling Metroid games more.  Regarding RPG's and the DS, there probably are more of them, but I can't agree with you that they are all any good.  The island survival one (I forgot the name) was terrible, and now they're going to bring out a sequel.  "Rocket Slime" did not live up to its hype.  That "Mana" one was not good, but that might be because whenever I see a "Mana" title, I want it to be up to par with the original "Secret of Mana" for the SNES.  I did like "Final Fantasy III".

Yes, the whole re-make trend is money gouging. There's plenty of that to go around no matter which company you look at. That's why God created the category known as emulators...so that you can play all the games you originally owned (like "Secret of Mana" for the SNES) without having to pay twice.

@ naznatips

What are you smoking?  Yeah, you may have a PSP, but obviously haven't played Syphon Filter, SOCOM or Portable Ops.

Oh and Jump! Ultimate Stars isn't a traditional beat-em-up (fighter), it's a fighter scroller and IMHO Powerstone is miles better!

You reckon the DS has a better range of games than the PSP.  I beg to differ.  The only area where the PSP is lacking a bit is in the RPG area (this is the major area for the DS seeing as most of the supposed big releases this year are RPGs), but this will be addressed once Jeanne d'Arc and Crisis Core come out amongst others.

Where are the DS's great racers?  Mario Kart, is that it?  What about the brilliant Burnout Legends on the DS, wow that one's good.  Aye right.  The PSP on the other hand has Ridge Racer 1 & 2, Burnout Legends & Dominator, Wipeout, Outrun 2006, Test Drive Unlimited, TOCA 2 & 3 just for starters.

What platformers? Yoshi's Island, Super Mario, Castlevania: Dawn of Sorrow....well the PSP has the brilliant Daxter, Rachet & Clank, Megaman Powered Up and Maverick Hunter X, Locoroco, Ultimate Ghosts & Goblins and Castlevania Dracula X Chronicles is due in a few months.

What Action/Adventure? The PSP has GTA Vice City and Liberty City, Syphon Filter, Portable Ops, Lego Star Wars 2 (yes a good rendition of the game) and Tomb Raider to name a few with Silent Hill and a new Syphon Filter and of course God of War coming later this year.

What decent Sports games can you get on the DS? If any?

You will find that the PSP although lacking in the RPG department fulfills genre ranges better over the course.  And there are games on the PSP that you just could not do on the DS and this is where the DS cannot fulfil entire ranges.

Don't get me wrong the DS is a great machine and does what it says on the box. Hence the 40m+ sales, but the urban myth that it have a better range of games for each genre over the course is just plain wrong. 

"much more available to any type of gamer" That's odd, I can't find a single game on the DS I like.