Microsoft's Windows Phone 7 Shake-Up

Updated with Microsoft comment.

REDMOND, Wash. ( TheStreet) -- Of all the smartphone buzz expected to circulate at next week's CTIA Wireless trade show, one of the hottest topics will be how Microsoft's ( MSFT) Windows Phone 7 will stack up against Apple ( APPL), Research In Motion ( RIMM) and Google's ( GOOG) Android operating system.

"Windows Phone 7 won't be an iPhone killer -- it will be an Android killer," writes Charlie Wolf, an analyst at Needham & Company who characterizes the smartphone market as a land grab. "It's virtually certain to ignite an all-out war between Microsoft and Google," he added, noting that the iPhone, which is enjoying a sales boom, is too well entrenched with users to be shaken by any newcomers.
Tech Tuesday

Certainly, Google's Nexus One opened to some mixed reviews, although rumors say that the nation's largest carrier, Verizon ( VZ), will soon start selling the device, which could open the Nexus One up to a huge market.

Northeast Securities' analyst Ashok Kumar agrees there is a big window of opportunity for Microsoft's OS, which is expected to start selling on smartphones around this year's holiday season. "Despite all the hoopla about Nexus One, it hasn't hit the tipping point -- two-thirds of the market is up for grabs," he told the TheStreet, adding that both Palm ( PALM) and Symbian, the OS used by Nokia ( NOK), are fading.

"When the new operating system arrives before the end of the year, Microsoft should finally be able to play in the same sandbox now occupied by the iPhone, Android, and BlackBerry," wrote Needham & Company's Wolf. "We've frequently criticized Microsoft's inept efforts in delivering a user-friendly smartphone operating system -- such criticisms are now in the past."

Indeed, Microsoft's first phone OS, Windows Mobile, hardly set the world alight. It currently ranks in fourth place behind Symbian, Apple and RIM, according to analyst firm Collins Stewart. This, however, could all change with the advent of the Phone 7 -- and even a Microsoft-branded phone.

"This much is certain, Windows Mobile, so far, has been a failure," said Northeast Securities' Kumar. " But Microsoft has resuscitated the interest of the user and the development community with Windows Phone 7."

Born out of Microsoft's Zune media player, Windows Phone 7 made its debut at the Mobile World Congress (MWC) event in Barcelona last month. Offering touchscreen capabilities, Microsoft's new OS also contains a number of hubs, which combine Web and application content onto a single screen. This could be used by gamers using Microsoft's Xbox LIVE on their smartphone, or for music content downloaded from a customer's PC.

Microsoft's Mobile Hurdles

Microsoft's second foray into the smartphone market also poses big challenges, like luring application developers onto its OS. Microsoft may be the 800-pound gorilla in desktop software, but Apple is undoubtedly the King Kong of mobile apps. Apple has more than 150,000 applications in its App Store, some 3 billion of which have been downloaded to iPhones and iPods.

A Microsoft spokeswoman explained that at Mobile World Congress the company announced the availability of over 1,245 applications in Windows Marketplace for Mobile, more than five times the number it offered when Marketplace launched in October 2009. "Additionally, over 1,325 software vendors are registered to deliver applications for work and play in Windows Marketplace," she added, in an email to TheStreet.

"Popular culture moves constantly, so the ability to have an enormous amount of developing applications is very important," Ken Denman, the CEO of telecom software specialist Openwave ( OPW), said to TheStreet. "Clearly Apple has a lead -- they have done the most with mobile applications."

Microsoft is on a mission to stake its own claim in this space. Earlier this week, at its MIX10 developers' conference, Microsoft unveiled Windows Phone Marketplace, an enhanced version of its first app marketplace, specifically aimed at developers building applications and games for Phone 7.

Microsoft will keep 30% of the revenue from Phone 7 applications, with 70% going to the publisher. (This revenue split is not without precedent; Apple keeps 30% of the revenue from applications sold on its App Store.)

Northeast Securities' Kumar believes that Microsoft could push this envelope, luring more developers onto its OS.

"If Microsoft is more magnanimous in terms of the economic split, there's no reason they can't get more support from the ecosystem," he said.

The other big challenge for Microsoft is forging deals with phone manufacturers, although a slew of companies like HTC and Dell ( DELL) are already signed up as Phone 7 partners. "In contrast with previous releases of Windows Mobile, which Microsoft licensed to any and all comers, the company is dictating rigid minimum specs for 7 Series devices," said Needham & Company analyst Wolf. " But widespread support seems assured when Windows Phone 7 launches later this year."

There is a bigger question mark, however, hanging over a Microsoft branded phone.

"My gut feeling is that the software release will be this year, but the own-branded phone will be a 2011 event," said Kumar. "They don't want to bite off more than they can chew."

With more than $9 billion in cash, great brand awareness, and a vast network of partners, it would be unwise to bet against Microsoft's smartphone push.

"It's theirs to lose," said Kumar. "If anyone has the balance sheet and ecosystem to support this, it's Microsoft."

-- Written by James Rogers in New York


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