Windows Phone 7Windows Phone 7 is breathing life into Microsoft's (MSFT) mobile phone operating system efforts, but analysts across the board caution that it's too early to take the patient off the critical list. Microsoft unveiled on Monday its initial lineup of smartphones that will use the mobile OS.

Microsoft and CEO Steve Ballmer are betting big on Windows Phone 7. They have no choice. Over the past year, Microsoft has been pummeled by Google's (GOOG) Android, with the PC software giant's smartphone OS market share falling to 5% in the second quarter compared with 9.3% a year earlier, according to research firm Gartner. And earlier this year, Microsoft decided to kill the Kin, its teen-oriented mobile phone just a few weeks after its launch.

"Windows Phone 7 will help put Microsoft back in the game," says Ross Rubin, executive director of industry analysis for NPD Group. "It's a vast improvement over where they were before, and now their [operating system] supports modern hardware."

Leveraging Microsoft Office

Microsoft, which is keenly aware that consumers are increasingly turning to mobile devices in lieu of a computer, needs to keep its hand in the game to preserve its dominance in operating systems and lucrative business software suites.

Steve Ballmer, Microsoft CEO

It's that tie into Microsoft's Office software that will provide Windows Phone 7 an advantage over Research In Motion's (RIMM) BlackBerry and the many phones based on Android, says Rubin. He notes that while competitors use third-party software to transfer Word files between phones and PCs, Microsoft has the advantage of its intimate knowledge of the file formats.

Microsoft is also expected to leverage its relationship with its Xbox gamers when its Windows Phone 7 debuts on the HTC Surround, which will feature two Dolby surround-sound speakers.

The HTC Surround, one of five phones that are slated to debut in the U.S. for the critical holiday selling season, will retail for $199, putting it in competition with high-end Android phones and the 16-GB version of Apple's (AAPL) iPhone 4. Like its iPhone and Android rivals, Microsoft, which eventually expects to reach 30 countries with seven new phones, is also going after consumers.

The All-Important Marketing Message

"The focus is certainly on consumers from the pitch that Microsoft was giving today. I would think people with a busy lifestyle with an interest in social networking games and music" are the target market, says Gartner analyst Carolina Milanesi in an email interview. "But despite the focus on consumers, the devices will certainly appeal to business users."

She added that she doubts users will choose an HTC Windows Phone 7 purely for its gaming capabilities rather than, say, a Sony (SNE) PSP handheld gaming device.

One of the biggest challenges Microsoft will face in winning over consumers is delivering a compelling marketing message, analysts say. "A Windows Phone 7 looks the same as an iPhone and an Android Phone. The hardware is similar, and the technology is largely the same. What will matter is the marketing, and I've looked at the ads and they haven't done it for me," says Jay Goldberg, a Deutsche Bank analyst.

Gartner's Milanesi had a similar reaction. "It does seem more like catch-up rather than a leapfrog offering, although the demo today was very compelling," she says. "I couldn't help but think how long would someone spend in a store to get the full story. When it comes down to selling the message, I am not sure that 'wonderfully me' and 'always delightful' actually means something to consumers."

Gotta Grab Consumers' Hearts

Microsoft, indeed, faces an upward battle. In its September mobile OS report, Gartner said it expects Microsoft's worldwide market share to rise to 5.2% next year from 4.7% at the close of this year. But by 2014, Gartner expects Microsoft's share to fall to 3.9%. Gartner sees Microsoft's declining market share resulting from the overall pie getting bigger but Microsoft not being able to hold onto its slice, in part due to several issues it's tackling today.

Milanesi says Microsoft still needs to learn the art of grabbing the consumer by the heart, more than the brain. In other words: "I want it cause it's cool," rather than because I need it.


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