In the rapidly evolving smartphone world, being a year behind is a recipe for trouble. If Microsoft focused huge resources on the problem, however, it might be able to close the gap.
Microsoft's mobile software business model is fatally flawed.
Microsoft is still trying to jam the square peg of the old PC-based operating system software model into the round hole of mobile. And that game is over for good.
Specifically, Microsoft is trying to charge handset providers a software license fee for every Windows-based smartphone they sell, the same way Microsoft charges PC manufacturers a software license fee for every Windows machine they sell.
Google gives its smartphone software, Android, away for free. Free is a good price, which is one of the reasons Android is rapidly taking over the smartphone world. Free is also ~$15 less per copy than Microsoft is reportedly planning to charge per unit of Windows Phone 7. But $15 is only $15, you say. It's not like it's hundreds of dollars per unit.
Carriers certainly aren't going to pay higher subsidies for Windows Phone 7 phones than they'll pay for iPhones and Android phones, especially if the software isn't state of the art. And consumers almost certainly won't pay, say, $214.99 for a Windows phone when they can get the latest iPhone or Android phone for $199.
And that means that charging $15 a copy for Windows Phone 7 software has become a non-starter.
(How will this play out? We suspect it will play out by Microsoft deciding to give Windows 7 Phone software away for free. As noted, the business is a rounding error, and charging for a product that the market leader is giving away for free is just a non-starter. Microsoft has already demonstrated its willingness to flush billions of dollars a year down the rat hole of search, so we suspect it will just decide to throw a few billion down the mobile rat hole as well.