I was wondering what a portable Gaming-System from Microsoft would need in order to compete against Nintendo and Sony. I fantasized a little and threw in some thoughts. Feel free to comment.

Price:
The first thing that came to my mind is the Pricing of the System. In my opinion a competitive price it is crucial to every console. The XBox360 is starting to move a lot of systems when the price dropped to 240€ / 180€. The Wii moved way more machines, when it was still the cheapest System you could buy. I think the perfect price for a XBox Portable would be 149,99€. Cheaper enough to justify an investment in the system and expensive enough to finance the hardware. On the other side the price makes the system sexy when compared to alternative buying options like an ipod or another portable console.

Hardware:
The Xbox Portable would need two analog sticks that feel a little more stable then the ones on the PSP. The left stick should be located above the D-Pad, so the analog stick is the primary device for directional input. The right stick should be underneath the action buttons. I know that in order to have a maximum of brand recognition, the portable system would need four action buttons labeled like the ones on the XBox 1 or 360. Though i would prefer less buttons. In my opinion three action buttons would be enough on a portable system. Then there are the shoulder buttons. Those shoulder buttons could function like the trigger buttons on the Xbox360 Controller or the L2 and R2 Buttons on the PS3 Pad, so that you could use them for throttle control on a racing game or something similar. The Xbox Portable would need a GUID Button like on the 360 Pad a Start and a "Back" button. Those could be located beneath the Display.The System doesn't need a Touchscreen. Instead it could have a Motionsensor, like in a Wiimote. On top of the system could be buttons for power and volume. Brightness would be handled by the firmware (and maybe a sensor for auto adjustment).
The backlit Display should have at least a 320x240 resolution with a size of 3,5". It doesn't need to be as big as the iPod touch screen or the PSP screen as long as the graphics look good and the battery doesn't drain in 4 hours. The hardware should be powerful enough to handle graphics, that come close to the XBox 1.
The System needs WiFi capabilities and should be able to play games over an AccessPoint with WPA2 encryption. It needs Stereo Speakers, a standard 3,5 Headphone jack and should support a Headset of some kind. The System also needs a USB 2.0 connector, with the ability of being charged over USB.
There is no need for an "Optical Drive", since games could come distributed via standard SD-Cards. Those Game-SD Cards would be read only and would come with a special copy protection, so that you can't read those cards on a PC and copy the game to a blank SD Card. Using SD-Cards as the standard medium for the device would allow the device to be used as a Photoviewer, MP3 Player or Video Player.
The Device itself could have between 2GB and 4GB onboard storage. More onboard storage would raise production cost and therefor the price of the whole system.
Battery life on the system should allow for at least 7 hours of gaming.

Features:
Games would come on SD-Cards (as stated above). The internal storage of the System would allow games to be downloaded via an Online Store directly to the system. You could be able to login with your Gamertag and buy Games on the Mobile Marketplace. The PSP-Piracy Scene has shown, that in theory it is possible to have a portable gaming device with downloadable games only. Why not learn from them and sell fullsize games online. Games you bought on the Marketplace would be locked to your system, but you could store them on a Computer. That way you would be able to download full retail releases at a lower price. Lets say a game on a SD-Card costs you 40€ at the store. You could charge 30€ for the download and people would pay for it (at least i would). 4GB of storage should be enough to allow for movie rentals. You could rent a movie on the Marketplace and download the same movie to your XBox and to your XBox Portable. The device would support XVID, DIVX, MP3, AAC, WMA, WMV and H.264 codecs. Pictures could be viewed in the JPG Format. The XBox Portable should be able to bring the XBox Live System to a portable Device whereas it allows you to view your Friends online status and play over the same XBox Live subscription that you have for your "big" XBox. The whole system needs to be region free, so you could buy games while on the road.

Thats all i can think of right now. What would you add to this?