By Stephanie N. Mehta
March 3, 2010

The software maker will try to catch rivals with Windows Mobile 7, but first it may need to mend fences with handset makers.

When Microsoft (MSFT) last month unveiled its Windows Phone 7 Series operating system for mobile devices at an industry event in Barcelona, Spain, the company reeled in plaudits from reviewers and bloggers trolling the trade show for new and interesting products. “You haven’t used an interface like this before,” enthused Engadget.  Gushed ZDNet: “Microsoft hit it out of the park.”

“I’m sorry Cupertino,” Gizmodo opined, referring to Apple’s headquarters, “but Microsoft has nailed it.”

Unfortunately for Microsoft, its triumphant announcement in Barcelona may also have had the unintended affect of annoying the cell-phone makers whose support Microsoft so desperately needs if it hopes to increase its presence in the important mobile-phone business. Why? By revealing its new operating system at least six months in advance of its availability—phones with Phone 7 Series will be available around the 2010 holiday season—Microsoft essentially told consumers to not bother buying phones with Windows Mobile 6.5, its current OS.

“Microsoft just took a gun and pointed it at the head of Windows 6.5 and said, ‘Don’t buy this’,” says Yankee Group analyst Carl D. Howe. “If I were HTC or one of their other handset customers, I’d be pretty mad.”

Indeed, according to a report in APC Mag, at least one HTC device running Windows 6.5, the HD2, will not be upgradable to the new Phone 7 Series system.

There also are rumblings that Microsoft and its handset partners are at odds over the way on-screen information  is presented to consumers. Phone makers typically like to have a uniform feel or user interface across their entire line of products.”My information is that Microsoft wants to have control so the devices have a Microsoft look and feel to them,” says Pete Cunningham, a senior analyst at technology research firm Canalys. “That may challenge some of the relationships they have.”

Oh, and Microsoft plans to charge phone makers to license its mobile operating system. Google (GOOG) makes its Android mobile platform available for free.

Given its weak performance in mobile phones, Microsoft can’t really afford to irritate handset makers, which, along with the phone companies, can strongly influence consumer buying decisions. Device makers can make or break one of their phones depending on how much money they spend on marketing, and how they position the phone to consumers and business people.

Representatives for Microsoft weren’t available for comment.

For Microsoft, the latest OS stumble has just added to its phone woes. Last year its operating systems was on about 9% of smart phones shipped worldwide, down from 14% market share just a year earlier, according to Canalys. Nokia’s (NOK) Symbian system was the  leader in 2009, with about 47% of the market, followed by BlackBerry maker Research In Motion (RIMM) at 21% and Apple (AAPL) with 15%. Android  had almost 5% of the market in 2009, up from less than 1% in 2008. Besides growing adoption among consumers, Apple, Google and RIM also benefit from robust developer communities that are building applications for their platforms.

Microsoft may have made its Phone 7 Series announcement so far in advance of the platform’s market launch, in part, to start attracting developers to its operating system. But Mark Lowenstein, managing director of consultancy Mobile Ecosystem, contends that Microsoft’s early look at the OS also gives the competition time to catch up and even surpass the features of the new Windows Mobile OS. “By the time they have commercial devices for Windows Mobile 7, we’ll likely have a new group of iPhones that include improved enterprise capabilities, and a RIM that will have an aggressive second half 2010 push,” he says. He also predicts Android’s share will continue to grow.

Analysts say the Phone 7 Series platform may be the software company’s last, best chance to get in the mobile game that has long eluded it. As computing has increasingly become more portable, moving from the desktop to the laptop to the netbook to the phone, it would seem Microsoft’s very future as a tech leader is at stake.

“The old saw in technology is that if you’re not one of the top two or three companies, it’s not clear you should be playing,” says Yankee’s Howe. “If they don’t succeed with this platform it is pretty much over.”

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