The New York Times news-paper on Friday said the new device is a smaller incarnation of a tablet personal computer designed primarily for entertainment. According to the report cited by Reuters, the first models will have roughly 8” (20.3 cm) screens and sell for about $1000 each, depending on the functions. Later versions may be smaller, with 4” screens.
To me, that doesn't sound like a carry-along mp3 player, but more like a handheld. It definitely sounds interesting, but I doubt it could be a serious contendor for the iPod, which has size as one of its key selling points. The features on the Microsoft device look pretty varied: drawing, videos, music, games, email... a smaller PDA, perhaps?