That would be pretty cool, but even if Microsoft did have sense enough to release such a device, it would hardly be able to remain within the Zune family would it.
I really don't understand what Microsoft is trying to do here. So the company has a gaming brand, and a portable digital media player brand both of which are taken care of by the same division. Will adding games to the Zune (some of which may have some sort of interoperability with XBLA) not just baffle the consumer?
Why didn't Microsoft just hold off on their digital media player and release an Xbox branded device capable of what Accelorata suggests but with plenty of added media support for things like music, video and the internet too? Kind of like a PSP done right.
Though some of the games will probably be pretty decent, I really don't think Microsoft has thought this one through.
Communism means you have two cows but you share the milk with the state.
Surrealism means you have two giraffes and the state requires you to take harmonica lessons.