The Surface Phone rumours had me scratching my head. Initially I dismissed them because it just didn't make sense, and sounded like someone was just going off on a what-if based on a render (and hey, concept renders are cool). The reason for the Surface was because none of MS' Windows 8 hardware partners were making a good Windows 8, and especially RT, tablet, so they had to make it themselves.
But that's not the case with Windows Phone, and Microsoft would have known this. Nokia is making a great phone with the Lumia 920 that's being compared against the iPhone 5 and the Galaxy S3. It's a de-facto flagship phone, and the 8X comes in quite nicely right underneath it. It doesn't make sense for Microsoft to try to compete with the Lumia 920 or the 8X (more importantly there's a question whether they actually could, only Nokia, RIM and Motorola make good phone phones, every other manufacturer can make good connected PDAs, but the sound quality in calls and reception leaves much to be desired, so Nokia is the only company that could build them a good Surface Phone).
Despite all these reasons that I'd dismiss the Surface Phone rumours, they're pretty persistent, with several sites saying they have insider information and are quite confident that the rumour is true, so I've tried making sense of it.
Apple has long been uncontested with the iPod touch, MS did try with the Zune HD, but only sold it in the states. Samsung made some lacklustre attempts with the Galaxy Player, as did Archos, but I don't think I've seen an ICS or higher Android competitor to the iPod touch. The iPod touch is definitely a big boon to the iOS ecosystem and marketshare. If, for whatever reason, you can't get a phone, or don't want one, but want the apps, the iPod touch is your one option.
A Surface Pocket would provide an alternative to the iPod touch. It would boost WP8 sales where the phones just wouldn't get them. The new iPod touch just went up to $300, so they could even undercut the price selling for $250 (even if they need to go to a 16GB version). It won't outsell the iPod touch out the gate by any means, but it will get WP8 into more hands than would otherwise happen. It'll grow WP8's marketshare without taking sales away from Nokia, HTC and Samsung, and it wouldn't leave investors and consumers confused and worried about phones from Nokia or HTC if MS is making a surface phone. The VaporMg case design would also work just fine with a Surface Pocket, as there's no concern about interfering with the cellular signal.