Microsoft is now in a handheld gaming PC race

Valve confirmed to The Verge this week that it’s working on supporting SteamOS on rival handhelds like Asus’ ROG Ally. It’s a significant move that could mean we eventually see Steam Deck-like devices running on Valve’s custom OS instead of Windows. If Microsoft doesn’t act fast, it could soon find itself in a battle to keep Windows relevant on handheld gaming PCs.

Valve has sold “multiple millions” of its Steam Deck handheld gaming PC. Omdia research estimates that nearly 20 million handheld gaming devices were sold worldwide last year, with that figure expected to grow to over 29 million per year by 2028. Nintendo’s Switch 2 looks set for a 2025 release, Sony’s portable PlayStation device is already here, and there are persistent rumors of an Xbox handheld. While the market is small right now, it’s growing and could potentially replace traditional game consoles for younger gamers who are already used to playing on mobile phones.

Most of the existing rivals to the Steam Deck run on Windows, but it’s not a great experience on handhelds so there’s an opportunity for SteamOS to become an even bigger threat. Microsoft has already been slow to respond to the Steam Deck, leaving Windows in a state that isn’t designed for small handheld-like devices. PC makers like Lenovo and Asus have built their own interfaces on top of Windows to make the operating system feel more handheld-friendly, but this only goes so far. A lot of the core improvements needed to make Windows better on handhelds will have to come from Microsoft directly.

There is basic stuff like being able to log in to Windows with a controller, or little things like the joysticks waking up handhelds in a bag, tapping in text fields and not getting a keyboard, and the keyboard disappearing when you move analog sticks. Microsoft needs to fix all of this and much more or risk SteamOS becoming a real alternative to Windows for these handhelds.

Microsoft is very aware of the Steam Deck threat. Sources at Xbox tell me the company is working on a variety of handheld-friendly features for Windows and its Xbox Cloud Gaming platform. I understand Microsoft has even been purchasing ROG Ally devices for Xbox employees recently as part of this effort, to ensure the handheld experience gets better in the coming months. If Microsoft is making its rumored Xbox handheld, software developers having access to ROG Ally devices sure would help, too.

We’re slowly starting to see some fruits of this labor in small improvements to the Xbox app on Windows and the built-in Game Bar overlay. Just this week, Microsoft announced that it’s making the Windows Game Bar more handheld-friendly with a compact mode that’s designed for smaller screens. A similar compact mode was added to the main Xbox app last year, followed by controller improvements to navigation in the app a few months ago.

We still haven’t seen much evidence of improvements at the heart of Windows, though. There was a leak of Microsoft’s prototypes for improving Windows on handheld gaming devices, but it was a hackathon project that never shipped. I suspect we haven’t seen many improvements to Windows for handhelds because there hasn’t been much appetite inside the Windows org to really focus on gaming in recent years. Microsoft called Windows 11 its “best Windows ever for gaming,” without adding many meaningful changes. The Surface hardware team has also never shown much interest in making a gaming laptop.

Part of the hesitancy here is undoubtedly due to Microsoft’s failed attempts to control the Windows PC gaming experience over the decades. Valve won the most important part of this with its Steam platform and store, and it takes a 30 percent cut on every game sale as a result. Microsoft has struggled to make its own store appealing to PC game developers, even with a big cut to the amount of revenue it takes from games on Windows to just 12 percent.

Microsoft is now very careful in how it approaches new Windows features, especially when they require investment that needs a return in the form of revenue. I’m fairly sure that’s why we’re only seeing improvements to the Xbox and Game Bar apps so far, because these are updated by the Xbox team instead of the Windows team.

A real overhaul of Windows for handhelds would require a lot of work, and it would mean moving the main Windows UI out of the way to make the entire experience more Xbox console-like. If Microsoft could match what SteamOS offers in simplicity while keeping the raw power of Windows behind the scenes, then it also has an opportunity to justify this work by pushing PC Game Pass on these devices.

Game Pass is one of the key reasons why you’d want Windows on a handheld gaming PC right now — because you can’t access the service through Steam. At the moment, Microsoft only really pushes Game Pass when you first configure a new Windows device. Conversely, when you power up an Xbox console, the entire homescreen is dedicated to pushing Game Pass. There’s a clear missed opportunity for Microsoft to capitalize on potential PC Game Pass growth through handhelds.

On SteamOS, the entire experience is built around your Steam library and everything Valve has to offer there. The Steam Deck is now a viable console and Windows PC gaming competitor thanks to SteamOS, years after Valve tried and failed to make Xbox-like Steam Machines a reality. Valve’s custom Linux OS utilizes Proton, a compatibility layer for Windows games to run on Linux. This has also been key in making Steam Deck a success because, without it, game developers would need to port their titles to Linux.

The other part of the hesitancy to improve Windows on handhelds feels like it’s linked to rumors of an Xbox handheld. Microsoft’s Xbox chief, Phil Spencer, has been dropping hints about a potential Xbox handheld for months. He regularly travels with a ROG Ally and has previously said he’s “a big fan of handhelds.” In an IGN interview in June, Spencer even said “I think we should have a handheld, too.”

I’ve written multiple times how I think any Xbox handheld should be Windows-based, with the ability to run Xbox games and the full Xbox dashboard taking over the interface you see when you boot the device up. That’s the ideal PC gaming handheld for me, one that runs Windows at its core but never exposes the complexities of Windows so it looks and feels like an Xbox console. If you want to hop into Windows, you can hit a button to do so, just like you can switch into the Linux desktop mode on the Steam Deck easily.

If Microsoft could pull it off, then it might just be the next Xbox console for a lot of people, especially if you can easily dock it to a monitor or a TV. It could also turn handheld gaming PCs from Lenovo, Asus, MSI, and others into portable Xbox consoles, too. There’s a lot of work involved to make this a reality, but when Valve is pushing ahead with its SteamOS ambitions for rival handhelds, that should send a clear signal to Microsoft that it needs to respond.

Thanks for subscribing and reading to the very end. I’m still eager to hear from you all about your experience with Teams. Do you love it or hate it? You can reach me via email at notepad@theverge.com.

If you’ve heard about any of Microsoft’s other secret projects, you can also speak to me confidentially on the Signal messaging app, where I’m tomwarren.01. I’m also tomwarren on Telegram if you’d prefer to chat there.