As Apple’s manufacturing partner Foxconn recentlybegan hiring workersfor assembly of anext-gen iPhoneand possibly a rumoredbudget iPhone, our friends over at Redmond are thought to be busy developing own branded smartwatch, smartphone and seven-inch Surface tablet. Both gadgets are viewed as direct responses to Apple’s rumorediWatchproject, its wildly successful smartphone and theiPad minitablet, respectively.

The smartwatch project is purportedly beyond the prototyping phase as Microsoft is said to have started aligning parts suppliers in Asia earlier this year, allegedly sourcing 1.5-inch screens. However, folks who apparently saw the prototypes warn it’s“unclear whether Microsoft will opt to move ahead with the watch”at this stage…

Microsoft smartwatch

Lorraine Luk and Shira Ovide, writing forThe Wall Street JournalMonday:

Microsoft Corp. is working on designs for a touch-enabled watch device, executives at suppliers said, potentially joining rivals like Apple Inc. in working on a new class of computing products.

iWatch concept (unknown 002)

Microsoft also“is continuing to test its own smartphone,”although it’s unclear whether or not the company will bring it to market, component suppliers said.

Microsoft a few years ago developed a SPOT service, which stands for Smart Personal Objects Technology. It was used in watches from Fossil, Suunto, Tissot and Swatch, all discontinued in 2008.

If Samsung made iWatch

As for the Surface mini tablet, theJournal last week assertedthat a seven-inch device is expected to go into mass production later this year.

One person familiar with Microsoft’s product plans said the 7-inch tablets weren’t part of the company’s strategy last year, but Microsoft executives realized they needed a response to the rapidly growing popularity of smaller tablets like Google Inc.’s 7-inch Nexus, which was announced last summer, and the 7.9-inch iPad Mini introduced by Apple Inc. last October.

We first heard last Novemberthat Microsoft was considering a smaller tablet in response to Apple’s iPad mini, which went on sale in October 2012. The originalSurface arrived in June of 2012to mixed responses. Thus far, sales have disappointed.According to IDC, half of the tablet computers shipped in the fourth quarter were smaller than eight inches.

http://www.youtube.com/watch?v=v3TZbP-VrLs

Additionally, Gartner researchers estimate the market for wearable smart electronics could be worth a cool $10 billion by 2016.

One analyst estimatedthe Apple smarwatch could drive an incremental $10 to $15 billion in revenue, or $2.50 to $4.00 in per-share earnings, each year, assuming annual sales of 50 million units and an average selling price between $200 and $300.

Bill Campbell, Apple board member and Chairman of the Intuit board, who was a close friend of Steve Jobs and advises Apple executives,last week alludedthat Apple’s next major breakthrough could be wearable technology:

Noting that he was not at liberty to give away specific details on future Apple gizmos, Campbell did tell the audience to expect to see “a lot of things going on with the application of technology to really intimate things.”

In addition to Apple and Microsoft,LG,GoogleandSamsungare all said to be working on their own smartwatch products.

Apple filed for a number ofpatentsand postedjob adsthat potentially reveal its unusually high activity in the wearable computing space.

Areportlast week suggested Adobe’s former Chief Technology Officer Kevin Lynch, whorecently landed a new jobas Apple’s vice president, is now working alongside Apple’s Technologies head Bob Mansfield and a team of100+ engineerson wearable projects for the iPhone maker.

Mockup top of post via Cult of Mac.