Microsoft's (NASDAQ:MSFT) Surface Mini -- the never-released smaller tablet that was killed off prior to the launch of the Surface Pro 3 -- could still be alive, according to a recent report from TK Tech News.

Source: Wikimedia Commons.

The site claimed the Mini could arrive in limited quantities before Christmas, possibly alongside a new RT-powered Surface 3. A previous review of a prototype Surface Mini at Neowin claimed that it had an 8-inch display and 1GB of RAM, and runs on Windows RT 8.1, although the site did not publish photos of the device.

These reports indicate Microsoft could have a supply of Surface Minis, but doesn't know if it should launch the device. In my opinion, clearing its inventory of Surface Minis (if it exists) at low prices could be a good way for Microsoft to gain a tiny bit of market share in tablets. However, manufacturing more units for an aggressive worldwide launch would be disastrous.

The wrong market at the wrong time
The first issue with launching the Surface Mini is that demand for 7-inch and 8-inch tablets is waning. According to IDC, those smaller devices accounted for 55% of tablet shipments in 2013, but will only account for 44.5% of the market by 2018. The reason is the rise of phablets (5.5-inch to 7-inch phones), which IDC expects to soar 209% year over year in 2014 and account for 14% of the entire smartphone market.

The Surface Mini would also needlessly prolong the life of Windows RT, Microsoft's ARM-based operating system that is incompatible with older x86-based software. Microsoft has been the only maker of Windows RT tablets since last September, after Dell, Samsung, Lenovo, HTC, Asus, and Acer gave up on the OS. Today, the only notable tablets and phablets that still run RT are the Surface 2 and Lumia 2520.

The Lumia 2520. Source: Nokia.

With the upcoming launch of Windows 10, Microsoft made clear that it intends to phase out Windows RT and Windows Phone by merging smartphones, tablets, and PCs onto a single OS. Launching the Surface Mini at this point would be a counterproductive move that doesn't advance this strategy.

Competing against partners and cannibalizing sales
Microsoft has been frequently criticized for competing against its Wintel allies with the Surface. While that might be true, the Surface can also be considered a reference design for companies such as Hewlett-Packard (NYSE:HPQ) and Dell, which manufactured clumsy Windows tablets and convertibles that repeatedly failed to compete against Apple's (NASDAQ:AAPL) iPads.

In April, Microsoft made Windows 8.1 free for tablets under 9 inches to compete against Android manufacturers, which ironically pay Microsoft a patent fee (estimated to be about $1) for every device sold. This led to the launch of cheap Windows 8.1 tablets including Toshiba's $99 Encore Mini and Acer's $150 Iconia Tab 8 W, which cost about the same as low-end Android tablets. Although such Windows 8.1 tablets aren't mobile powerhouses, they can run traditional Windows software instead of the RT's restrictive selection of Windows Store apps.

Toshiba's Encore Mini. Source: Toshiba.

These cheap Windows 8.1 devices could finally help Microsoft grow its footprint in the tablet market, which it only claimed 2% of in 2013, according to Gartner. By comparison, Android held 62% of the market while Apple claimed 36%.

It makes no sense for Microsoft to launch the Surface Mini to indirectly compete against these new Windows 8.1 tablets. The Mini will just confuse customers again regarding the differences between Windows RT and 8.1, and possibly cannibalize sales of the Surface Pro 3 and Surface 2.

A Foolish final word
Microsoft investors should hope the company avoids a wide-scale launch of the Surface Mini. The company made the right call to kill off the device the first time -- demand for smaller tablets is falling, RT is already on life support, and cheap Windows 8.1 tablets are much more promising.

However, if Microsoft sells whatever remains of the Mini at fire sale prices, as HP previously did with the TouchPad and BlackBerry did with the PlayBook, it could be a unique opportunity for consumers to pick up a cheap new tablet. Moreover, the Surface Mini could eventually be upgraded to the ARM-based version of Windows 10, so the device won't end up as outdated as the TouchPad and PlayBook.