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That Darned Microsoft Zune Phone Rumor Pops Up Again

CES2009 is fast approaching, which may be why rumors are again circulating that Microsoft [MSFT] will soon launch a Zune-based iPhone rival. Despite the fact that Steve Ballmer, in referring to the iPhone said "It's not a concept you'll ever get from us. We're in the Windows Mobile business." Global Equities Research's analyst Trip Chowdhry has got all excited on the matter, and in an article in Barron's he makes the suggestion that Ballmer will use his CES keynote slot to spill the news.

Okay, on the "pro" rumor side, Microsoft surprised lots of people with the launch of the Zune MP3 player. It was a clear attempt to steal some market share in a space already conquered by Apple and the iPod, and Microsoft was already indirectly in the hardware game. When you look at the iPhone phenomenon and its billion-dollar success it would seem only reasonable that someone high up in Microsoft's management chain would suggest aiming at this market too. A couple of Microsoft patents exist, demonstrating the concept's definitely been explored.

On the "con" side you have the fact that Windows Mobile is the software on most smartphones other than the iPhone: it's a flexible, successful, customizable OS soon to be in its seventh generation. It makes Microsoft millions of dollars all by itself, without requiring Microsoft to set foot any further into the complicated hardware business. Bill Gates himself earlier this year said about a Microsoft phone "No, we won't do that."

But a Microsoft phone's such an intriguing concept it seems it just won't go away. There've been recent rumors about a secret MS project dubbed "Pink," strongly suggested to be a cellphone. Nvidia is rumored to be working on an exclusive chip for an MS product, and Ballmer himself in October hinted that the software developed for the Zune was ripe for porting to PC and WindowsMobile environments.

With the Google G1 Android-based phone, Google have demonstrated that it's possible to partner with a manufacturer—HTC—-and achieve a product that's certainly captured a lot of interest, even if its sales are a drop in the iPhone ocean thus far. Apple is without doubt already deeply embroiled in designing the third-gen iPhone. Microsoft may be seeing the market closing up ahead of its own attempts to create a smart cellphone.

And now that Bill's gone, that "No, we won't do that" comment need not necessarily carry the same weight.

But seriously: Apple's traditionally based its success on a tightly managed marriage of in-house hardware and software, while Microsoft makes software for a host of other people's machines. The Windows Vista fiasco hasn't faded from consumer's memories yet. The Zune's roughly 4% market share is disappointing, and if Microsoft makes its own phone, its Windows Mobile customers will balk at the potential for sales cannibalization.

It's certainly possible that a Zunephone may pop into existence, and without doubt in a Microsoft lab somewhere there are a number of prototypes knocking around. Chowdhry seems to think if it emerges it'll take the Zune core functions into a Sidekick-style device with motion-sensing electronics. Throw a multitouch screen in there and you'd without doubt have an interesting device. Interesting, for sure: but that simply doesn't have to mean it'll make it into a real product.

[Barron's via Wired]