Well when does it stop being a handheld and edges into the netbook realm?
What is the problem with a small netbook with good gaming controls? I just took my Asus eee pc with 7" screen in my hands and I can see a lighter and smaller version - but the same screen size and gaming controls - work. The eeepc has a huge bezel. So make that smaller, smaller keyboard and no touchpad and voilà.
Keeping the same case or not, the Pandora is pretty much on the limits of pocketability. 5" is probably the maximum because if it were any bigger it would have to make the case bigger which, as suggested, is already at the limits of comfortable pockets. In fact, a number of wishlists have asked for something just a little bit smaller, so there's significant interest in not making it any bigger if it can be avoided.
Never understood the 'need to be able to carry it in my pocket' argument. Pandora is already much too large and heavy to do that, carrying it will ruin your trousers and makes you walk funny. Maybe this is an argument for kids playing games on the school yard but that is a period I can't even remember anymore
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I think from a gaming device point of view there is already quite some competition (e.g. Shield). The real advantage of the Pandora is its ability to be more than a gaming handheld. It is a Linux mini-pc with gaming controls.