Now that Bill Gates’ situation is sorted out, tech journalists can get back to obsessing over whether Microsoft (Nasdaq: MSFT) is developing its own version of the iPod.

The latest rumors of the mythical mPod appeared recently in a Reuters report, with unnamed sources saying Microsoft is showing the device to music companies. I’d argue that Microsoft has already developed an iPod challenger, and it’s been on sale for a couple of weeks at Best Buy (NYSE: BBY) and Amazon.com (Nasdaq: AMZN) for about US$200.

If you squint, you’ll even see the Windows logo on the box.

iRiver’s Silent Partner
The device is called the Clix. It’s a matchbox-sized digital-music player that looks like the top half of a standard iPod. And just like an iPod, it has a bright color screen that displays album covers when music is playing. It also displays photos, records speech, receives FM radio and plays videos and simple video games.

On the inside, Clix has 2 gigabytes of storage and up to 25 hours of battery life — about 80 percent more than the iPod nano.

Technically, Clix is made by iRiver, a South Korean electronics company with U.S. headquarters in Vancouver, Wash., but it’s as close as you’ll get to a Microsoft digital-media player. The Redmond, Wash., company played a big role in the product’s design, engineering, software, testing, packaging and marketing. It’s now pushing Clix as a premier device for the new Urge online music store it’s operating with MTV.

Microsoft’s SWAT Team
Clix is one of the first efforts of a new group at Microsoft going after Apple Computer’s (Nasdaq: AAPL) digital music business in a stealthy way.

Rather than build Microsoft-branded devices, the team is working closely with companies building Windows-friendly devices to make sure they’re competitive with the iPod. It’s sort of like a SWAT team bringing Microsoft’s firepower to give partners an edge.

The team engaged with iRiver in November to remake its close-but-no-cigar U10 device into the slick, Urge-worthy Clix.

Microsoft specified the silicon. It encouraged iRiver to upgrade the chips and graphics engine, but iRiver made the final call on engineering decisions, said Sean Alexander, project lead on the Windows Digital Media End to End Experiences team.

“iRiver was already well on their way to building a great device,” he said. “The collaboration just gave it that little something special to put it over the top.”

The goal was to develop a device that showed off Microsoft’s digital media lineup: Urge, a new version of Windows Media Player and copy protection software.

Kinder, Gentler, More Collaborative
In years past, Microsoft bullied PC makers into doing what it wanted. Now it’s trying new approaches.

To compete with Sony (NYSE: SNE) , Microsoft built the Xbox. To compete with the iPod, it’s helping device makers rise to the challenge.

Microsoft may still build its own media player, but that would be bad form after putting so much work into Clix and gleaning all that knowledge from iRiver.