Microsoft CEO Steve Ballmer announced Windows Phone 7Got avatar, will go.

Microsoft (MSFT) announced Tuesday it plans to offer Xbox Live games for its soon-to-be-released Windows Phone 7 mobile operating system, marking a move by the software titan to gain an edge in the highly competitive smartphone arena.

For Microsoft, there's a lot riding on its move to get users to adopt its smartphone operating system, given that handsets are rapidly becoming the decfacto personal computer for many. Microsoft plans to launch its Windows Phone 7 OS and mobile Xbox games in time for the critical holiday selling season, said a company spokeswoman.

Smartphone operating system market shareMicrosoft Windows Mobile Lags

But analysts remain skeptical that even Xbox games will dramatically advance Microsoft's standing with other mobile OS makers.

Phones running Google's (GOOG) Android operating system advanced like wildfire in the second quarter, while Apple's (AAPL) hugely successful iPhone, with its proprietary OS, each accounted for a double-digit market share slice, according to research firm Gartner Group. Meanwhile, Microsoft Windows Mobile dropped to 5% in the quarter from 9.3% a year earlier.

"Microsoft fell behind because of Windows Mobile 6.5 and Windows Phone 7 will keep them in the game a little longer," says Jay Goldberg, an analyst with Deutsche Bank. "Xbox Live will help them stay relevant."

In addition, Microsoft's Xbox Live mobile will be a watered-down version of the regular Xbox console, potentially tempering customers' enthusiasm for it.

Develop a Following

Mark Sue, an analyst with RBC Capital Markets, expressed a similar sentiment and noted that Microsoft could take some steps to develop a following.

One step calls for amassing an ecosystem of developers who would write applications for Windows Phone 7, while other steps may involve working closely with device makers to ensure an accelerated timetable to market. Nonetheless, Microsoft officials are optimistic about the future of Windows Phone 7 and the Xbox Live games.

"This is also the year of expansion for the Xbox 360 in terms of new audiences, new markets for Xbox Live and multiple platforms," said Chris Lewis, Microsoft's Interactive Entertainment Business vice president, in a statement. "With Xbox Live on Windows Phone 7, we are bringing the quality, consistency and community of the Xbox experience to games on the go."

Sony Ericsson Gamer Phone?

Some of the games slated for Windows Phone 7 include Halo Waypoint, ilomilo, Uno and Bejeweled Live.

Apple has its extensive array of games for iPhones, while Google is quickly catching up in games made for Android. And electronics giant Sony (SNE) last year reportedly was looking at jumping in with a hybrid cell phone and game player. It appears things have substantially moved along, with Sony Ericsson reportedly developing an Android-based phone and gaming device, according to a report by Engadget.

And should the stars align just right, the Sony Ericsson gamer phone and Microsoft's Windows Phone 7 devices may be coming out in time to get both on those holiday wish lists.

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