Microsoft's latest phone experiment

SEATTLE (Reuters) - Microsoft Corp will show off its latest mobile phones on Monday, but don’t expect a direct rival to the iPhone.

The world’s largest software company is trying a new tack in the hotly contested arena with its long-awaited “Project Pink” devices.

Unlike Apple’s popular device or Research in Motion’s BlackBerry, they are aiming at hyperactive teenagers who want multiple instant messaging accounts, e-mail, games, music and Facebook in a cool-looking package.

The phones won’t be powered by Microsoft’s upcoming Windows Phone 7 software, and will be priced much lower than the iPhone or Google Inc’s Nexus One.

But investors will be watching closely as Microsoft, which has ceded ground in past years in handheld devices, attempts to reassert itself in a small but significant way.

The Microsoft-branded phones -- made by Japan’s Sharp and sold by Verizon Wireless -- are the souped-up descendants of the Sidekick, originally made by hip phone developers Danger, which Microsoft bought two years ago.

With distinctive slide-out keyboards and swiveling screens, Danger’s phones are popular with a young urban crowd that has more in common with Microsoft’s Xbox gaming audience than its mainstream business-oriented software.

“This is a trial for Microsoft,” said Toan Tran, an analyst at Morningstar. “If this goes well or better than they expect, they may be more willing to dip their toe in the water and build a full-fledged phone.”


Apple’s minutely designed iPhone showed the weakness in Microsoft’s approach of creating mobile software and letting handset makers like HTC, Samsung and Motorola control the rest.

Among the array of Windows-powered phones, few approach Apple’s smooth user experience, which has attracted tens of millions of customers and redefined the smartphone category.

Microsoft admitted as much when as it launched its new Windows phone software in February, saying it was working more closely with phone makers to make sure the resulting products hit the mark. The arrival of the first of the new phones this autumn will determine their success.

In the meantime, Monday’s “Project Pink” phones -- which will have a new name at launch -- appear to be an experiment in building its own-brand phone, if only for a limited market, reducing the chances of upsetting Microsoft’s handset partners.

“It’s the great age of experimentation in mobile devices,” said Kim Caughey, senior analyst at Fort Pitt Capital Group. “These companies are doing experiments to figure out how big all these sub-demographics are.”

Microsoft has a good chance of succeeding, said Caughey, citing sales of Xbox sales to a similar crowd.


But the scale of the experiment is small. No more than 30 million social networking/messaging phones were sold in the United States last year, according to Wall Street analysts. In total, 1.1 billion mobile phones were sold worldwide in 2009.

Making an impact in a small but important entry level market would be a significant win for Microsoft, which risks losing a generation of young users to Apple and Google.

“This is a critical product for Microsoft, they have been doing very badly in the smartphone market,” said Jack Gold, who heads technology research and consulting firm J. Gold Associates. “They basically have to do something to get back into the market space.”

The latest figures from comScore show that Microsoft lost 4 percentage points of U.S. smartphone market share in the last three months, leaving it with 15 percent, behind Research in Motion and Apple. If current trends continue, Microsoft will be pushed into fourth place this summer by fast-growing Google.

“The last two years, we have really seen nothing out of Microsoft around handheld devices that connect. That’s an eternity in this particular space,” said Professor N. Venkat Venkatraman, chairman of the Information Systems Department at Boston University’s School of Management.

Microsoft missed early opportunities to integrate the Xbox, Zune music player and social networking functions into a handheld format, said Venkatraman. Instead, the company is now offering a “patchwork of ideas from an over-bureaucracy.”

Monday’s phones are not an attempt to revolutionize mobile computing, like Apple’s iPad, but they will be a vital signpost showing Microsoft’s approach to innovation, and may give hints on the likely success of Windows 7 phones later this year.

“This is their last chance,” said Gold. “Microsoft’s got a lot of money, they can stay in a market forever if they choose. But if they don’t get this right over the next six to 12 months, they’re gone.”