For Microsoft to regain its reputation as an innovator, it’s not enough for consumers to declare “I’m a PC,” as they have in the company’s high-profile ad series. They also need to get on board with Windows Phone 7, Microsoft’s attempt to reboot its mobile strategy and introduce an operating system that’s more consumer friendly. With its new offering, the one-time frontrunner is hoping to recapture momentum in a U.S. smartphone market dominated by Apple’s iPhone and Research in Motion’s BlackBerry, with Google’s Android platform quickly gaining buzz. Microsoft needs a bold move to regain lost ground, Wharton experts say, but it’s unclear if Windows Phone 7 is enough to make the software giant “phone fashionable” again.

Designed to integrate video, Xbox games, the Bing search engine and Zune music into one mobile device, the Windows Phone 7 platform was unveiled by Microsoft in February. Gadgets equipped with the system are expected to hit stores by the 2010 holiday season via manufacturers and wireless carriers, including AT&T, Verizon Wireless, Sprint, T-Mobile, HTC, Samsung and others. Microsoft CEO Steve Ballmer said on February 15 at the 2010 Mobile World Congress in Barcelona, Spain, that the company’s latest effort is designed to stand out “in a crowded market filled with phones that look the same and do the same things.”

Users of Windows Phone 7 can keep track of Facebook updates, weather reports, news and other information using “live tiles” that replace static icons with vibrant, continually updated content blocks that can be rearranged with the touch of a fingertip. There are also “hubs” that organize applications into categories, such as People; Games; Music and Video; Marketplace; and Office, including Microsoft Excel, Word and OneNote documents. The approach is designed to better compete with the iPhone and efforts from Motorola, which is pushing real-time content to devices powered by Google’s Android operating system.On March 18, Microsoft introduced tools that allow software developers to build, and put on the company’s marketplace, applications for playing games, conducting business and interacting with peers. Windows Phone 7 represents a complete “do over” by Microsoft and is not compatible with Windows Mobile 6.5, the company’s current mobile operating system.

As competitors and new innovations appeared on the scene, Microsoft has watched the Windows Mobile operating system’s global market share fall from 11.8% in 2008 to 8.7% in 2009, according to research firm Gartner. But there is no guarantee that Windows Phone 7 will put the company back in the smartphone game.

“The move to Windows Phone 7 makes sense to me,” says Kartik Hosanagar, an operations and information management professor at Wharton. Citing usage data by research firm Quantcast, Hosanagar notes that “there has been a huge drop in Windows Mobile usage” since 2007 and the launch of Apple’s iPhone. “That data suggests a strong correlation between the iPhone’s success and the failure of Windows Mobile. You can see where Microsoft is coming from.”

Indeed, comScore, which tracks mobile phone usage as well as Internet traffic, reported Microsoft’s January market share in the United States was 15.7 % — good for third place, but down 4% from October 2009. BlackBerry is the top smartphone platform in the U.S. with a 43% market share, followed by Apple with 25.1%. Global market share figures put Nokia’s Symbian operating system on top, but the platform is not a frontrunner the United States.

“Microsoft had to make a clean break from the previous operating system,” says Wharton management professor David Hsu. “The company was at risk of being shut out of a category that’s growing.”

The Windows Phone 7 effort is just the latest rebound attempt from Microsoft. The company launched the Bing search engine in 2009 in an effort to catch up with Google. So far, Bing is steadily gaining ground, ending February with 11.5% of the search market, up from 9.4% in September, according to comScore. The Zune music player was an effort to compete with Apple’s iPod, but the product hasn’t caught on with consumers. Other late entries, such as the Xbox gaming system, have been more successful. The Windows 7 PC operating system is another comeback story and appears to be enticing customers to leave Windows XP — the predecessor to the heavily criticized Windows Vista.

Is It Too Late?

Rallying in the tech sector is becoming increasingly difficult, Wharton experts say, noting that Microsoft has been forced to perpetually play catch up to Google and Apple in recent times, but adding that it’s too early to count the software giant out of the game. “Microsoft has this history of taking a wait-and-see approach to new markets,” Hsu notes. “It’s an artifact of being a large, incumbent organization.”

Still, “there are great ideas inside Microsoft,” says Wharton legal studies and business ethics professor Andrea Matwyshyn, who adds that the company’s research unit is developing cutting-edge technology. “There’s innovation, but does it bubble up fast enough to have the technology included into products?” She notes that Microsoft has historically been content to be a fast follower in new markets, but it’s uncertain whether the company can continue to take that approach.

Microsoft officials think Windows Phone 7 puts the company on the right smartphone track by making a unique proposition to consumers. “There’s no doubt that this phone market is a) highly competitive, b) highly dynamic, and c) super exciting,” Ballmer said at February’s Mobile World Congress. “And there is no question in our minds as we go back a couple years that we needed, and wanted, to do some things that were out of the box, clearly differentiated from our past, and … clearly differentiated from other things going on in the market.”

At that February kick-off for Windows Phone 7, Ballmer portrayed his company as one that has learned from previous mistakes. For instance, Microsoft is taking a bigger role with hardware partners to design specific requirements to “allow us to [create] great experiences” and ensure Windows Phone 7 complements strong smartphone designs. Ballmer added that Windows Phone 7 is a critical component to Microsoft’s three-screen strategy encompassing phone, PC and TV. The ultimate goal is creating an integrated environment for software, services and applications.

The approach may be right, but the question is whether Microsoft can deliver. “Apple’s success is about the ecosystem that’s somehow [united] with all of its products. Everything fits into an ecosystem that enables a digital lifestyle,” Hosanagar says. “The success of the iPod contributed to increased market share for the Mac and also helped to drive the interface and success of the iPhone. And Apple is leveraging all of that with the iPad. Microsoft just hasn’t taken that ecosystem approach with its products.” Hosanagar adds that, instead, Microsoft has built products in siloed divisions that didn’t connect. “Windows Phone 7 is an effort to acknowledge that Microsoft needs to manage the ecosystem better.”

Experts suggest that “siloed” product development issues are one of the big reasons Windows Mobile failed to keep pace with the iPhone and Android platforms. “Nothing about Windows Mobile was part of an integrated strategy,” says Eric Clemons, an operations and information management professor at Wharton. “The iPhone is both a halo brand and a marvelous extension device, making the Mac more attractive. The Google phones are part of a platform strategy. Windows Mobile was just another sales opportunity, sort of as if Microsoft had bought a Seattle brewery.”

Apparently, Microsoft gets the message. “A phone is an intimate piece of hardware that you carry with you, and you don’t just use it for functionality, as a work tool and as a home tool; it’s an expression of your personality and who you are. It should be delightful and engaging and it should make people smile when they use it,” Joe Belfiore, vice president in charge of program management and design for Windows Phone 7 devices, saidat the Mobile World Congress in February.

But will Microsoft’s new mobile operating system be enough to stop the slide of its market share and spur growth? The iPhone and Android platforms aren’t standing still, either. “The consumer side of the smartphone market is crowded,” says Kendall Whitehouse, director of new media at Wharton. “But people are counting out Microsoft much too early. Microsoft is a very strong company with a diversified product line, a lot of cash and a strong base of developers. And it is tenacious.”

Analysts say that Microsoft is at least back in the running with Windows Phone 7. “Windows Phone 7 Series is a major step forward for Microsoft in becoming relevant in the smartphone market, an area that remains a major soft spot within its broad portfolio of Windows-based products and services,” Barclays Capital analyst Israel Hernandez said in a research note. Hernandez added that there is more room for growth in the smartphone market. According to research firm IDC, there were 174.2 million smartphones shipped in 2009. That sum accounts for 15.4% of all mobile phones shipped, up from 12.7% in 2008.

Consumer vs. Corporate

At the core of Microsoft’s launch of Windows Phone 7 is capturing the interest of shoppers in search of mobile devices that will complement their busy multimedia lifestyles. Although company officials made a passing mention of the product’s business-focused features, such as Office, they emphasized the system’s capabilities for social networking, games and music. Executives at the software giant have acknowledged that Windows 7 will initially be geared toward general consumers, rather than corporate customers.

But experts at Wharton are unsure about the effectiveness of a consumer-first strategy, an approach that was successful for Apple and Google’s Android platform. They suggest that Microsoft may be better off playing to its strength with corporate customers. Matwyshyn and Whitehouse suggest that Research in Motion’s BlackBerry, which generally attracts a more business-oriented audience, may be an easier mark.

“Microsoft appears to be following the Apple formula,” says Matwyshyn. “If Windows Phone 7 is designed to be a challenger to Android and the iPhone, that makes sense, but it strikes me that the enterprise route and the BlackBerry will be an easier target to work with.” She adds that the level of passion for BlackBerry devices doesn’t compare to the enthusiasm for Android phones and the iPhone.

According to Whitehouse, Microsoft has a natural affinity with corporate customers and may be better suited to lock down that category first, and then go after the general public. “I would argue that there is not one smartphone market — consumer and enterprise needs are different.” Hosanagar, however, acknowledges that while Microsoft has traditionally appealed to corporate customers, the mobile market is converging. Consumers are increasingly bringing the iPhone and other popular devices to work.

Charlie Kindel, a Microsoft executive who is spearheading Windows Phone 7 development, outlined the company’s position in a blog post. He noted that the operating system’s devices are focused on the consumer, who most likely also happens to be an employee of a corporation. “We know … end-users have busy personal and business lives. We are building a phone that will be great for helping users deal with both lives.”

But the corporate world may ultimately be Microsoft’s chance to set itself apart from the competition, notes Hsu, who expects the company will ultimately innovate by accessing institutional documents, connecting to business applications such as Office and SharePoint, and giving companies better controls for security. Indeed, Microsoft will need every advantage it can get if the company wants to keep pace with Apple, Google and Research in Motion. “Microsoft needs to be in this business and it will need to differentiate itself,” says Hsu.

Still, it is too early to predict whether Microsoft will emerge as the leader of the smartphone race. “At the end of the day, Windows Phone 7 may be like Bing,” Hosanagar says. “Bing helped Microsoft, but wasn’t a game changer. I doubt Windows Phone 7 is a game changer … just something that puts it back into the mix. Ten years ago, Microsoft had monopoly power and no one wanted to compete with it. Now, we’re asking whether Microsoft can compete with the others. Things have changed.”