Reports are circulating that Microsoft is building a 7-inch Surface tablet with Xbox gamers in mind. An Xbox Surface tablet would be crafted for enjoying video games and could compete with Nintendo and Sony handhelds.

The rumored tablet would fall in the 7-inch category, competing squarely with the Amazon Kindle Fire, Barnes & Noble Nook Tablet, Google Nexus 7 and new iPad mini. Well, sort of. With its Xbox spin, Microsoft's tablet would be in a world all its own.

The rumored specs include a custom ARM processor with high-bandwidth RAM for gaming demands. The Xbox Surface would reportedly run a custom version of Windows. No price points were offered in the reports.

Games, Movies and Music

Rob Enderle, principal analyst at the Enderle Group, said a gaming-oriented tablet from Microsoft made sense.

"Microsoft has been fooling around with the handheld product for a while. The Surface platform allows them to do this, and gaming should be the focus because the 7-inch class is all about media consumption," Enderle said. "The Xbox has not only games, it's got movies and music."

As Enderle sees it, an Xbox Surface would fill an obvious gap in Microsoft's new tablet line up. Microsoft does not yet offer a 7-inch tablet. At the same time, the Xbox brand carries plenty of weight with gamers, so much so that Microsoft recently introduced the concept of Xbox Music.

"A Surface Xbox could be substantially better than either Nintendo or Sony's offering because the platform is much stronger and more robust," Enderle said. "Like Google, Microsoft would have a family of products that would address different needs that could easily interoperate. You could have a large Surface and a small Surface and play games on both."

Counting the Costs

Price would be a factor in the Xbox Surface's success. It remains to be seen, if an Xbox Surface is manufactured, how the pricing would compete with Nintendo and Sony gaming handhelds.

The Surface RT model with the minimum 32 gigabytes of RAM and an optional black Touch Cover carries a bill of materials of $271, according to a preliminary estimate from the IHS iSuppli Teardown Analysis Service. When the $13 manufacturing expense is added in, the total cost to manufacture the Surface rises to $284. Of course, a 7-inch tablet would presumably cost less to manufacture.

"The Surface represents a key element in Microsoft's strategy to transform itself from a software Relevant Products/Services maker into a devices and services provider," said Andrew Rassweiler, senior principal analyst, teardown services, for IHS.

"Key to this strategy is offering hardware products that generate high profits on their own, similar to what Apple has achieved with its iPad line. From a hardware perspective Microsoft has succeeded with the Surface, offering an impressive tablet that is more profitable, on a percentage basis, than even the lucrative iPad based on current retail pricing."