Some good posts in this thread. Originally, when the rumours of a lower spec machine surfaced, I thought about a handheld. Every next gen game on the go? Boom - Microsoft land their kill shot!
But, as others have highlighted here, the physical restrictions on it just prevent it from happening. Unless Microsoft and AMD’s engineers have created a literally technical miracle, getting the power and heat into and out of a box in held held form - even for the lower specs of Lockheart - is just impossible.
I think the differentiator is going to be the pricing model, not the form factor. A smaller box, sure, but about as portable as a GameCube.