Microsoft still gets the bulk of its sales from software such as its Windows operating system and Office suite. But the company has offered a number of consumer electronics products in recent years, most notably its Xbox video game system.

The first Xbox lost billions of dollars, but the company has positioned itself to capture share -- and potentially profit -- with its second-generation device, the Xbox 360, which launched a year ahead of Sony's upcoming rival machine.

Leading the charge on developing the new digital media player are reportedly veterans of the video game wars, Robbie Bach, president of Microsoft's entertainment and devices division and J. Allard, vice president in charge of the company's Xbox efforts. Assuming the reports are correct, the company may be attempting to apply the lessons it has learned in the video game space.

"It would be a natural step for Microsoft to do its own hardware that is easier to use with PCs and supports the latest technology for transferring music and protecting it," said Rob Helm, research director for Directions on Microsoft, said.

Investors seemed to shrug off the news. In after-hours trading following the reports, shares of Apple were off 14 cents, or less than 1%, to $56.86, while shares of Microsoft were unchanged at $23.35.

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