Microsoft is working on a handheld gaming device that will also play music and movies in a challenge to rivals such as Sony and Apple, the San Jose Mercury News said today.

The software giant’s new device will probably not hit the market for at least a year the newspaper said, citing unidentified sources. It will compete against popular gadgets like Sony PlayStation Portable, which can play games, music and movies, and Apple Computer iPod music players, the report said. The project is being headed by vice president J Allard and other veterans of the team responsible for Microsoft’s Xbox video game console, it said. Microsoft has so far targeted the gaming and mobile markets separately. It launched its next-generation Xbox 360 game console last November, and earlier this month unveiled a portable computer the size of a paperback book.

The newspaper claims that Microsoft has some of its most seasoned talent from the games division that created its popular Xbox 360 working on the project. 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 Xbox 360 launches in Australia today.

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