Businessweek suggests so, although the article does say that MS hasn’t decided whether or not to go ahead with it.
BusinessWeek has learned that the software giant is working on plans to develop its own portable digital media device to rival the iPod, rather than just providing technology to partners… Xbox boss Peter Moore says any Microsoft media device would have to leverage the company’s most significant consumer strength, video gaming. “It can’t just be our version of the iPod,” says Moore, who nonetheless would not confirm that Microsoft is considering making such a device. So in addition to playing music and videos, a Microsoft device would include games. Microsoft would probably use the Xbox brand to market the gadget. “I think the brand is an opportunity,” Moore says.
If Microsoft really is planning an Xpod, it’s a very risky strategy: Nintendo’s DS and Sony’s PSP are already well established, and of course Apple makes a little white box called an i-something or other. More to the point, Microsoft would be actively stepping on the toes of its partners. With the Xbox, Microsoft didn’t have anything to lose, because it didn’t have lots of firms making gaming consoles that used Microsoft’s systems. With portable media, though, Microsoft already has a legion of firms making MP3 players, portable media centers and so on. Becoming a direct rival could seriously backfire.
Perhaps there’s a related option: an Xpod specification, backed up with an Intel Inside-style marketing deal, that sets the minimum requirements and key things such as the interface for add-ons such as speaker systems. Partners would still build it and put their own stamp on it, but Microsoft would have a more consistent suite of iPod rivals.
Or it could assassinate Steve Jobs.