Zune phone makes sense, but politics could prevent it

They're back: rumors of an impending Zune phone announcement from Microsoft, this time probably at CES.

Ever since the launch of the Zune, with its far superior music playing software compared to the player built into Windows Mobile, people have urged Microsoft to incorporate the Zune software into a phone. That idea has spurred rumors of a Microsoft-branded phone that includes the Zune software and is targeted at consumers. The latest speculation has Microsoft CEO Steve Ballmer introducing a Zune phone at CES in Las Vegas in January.

Microsoft flat out denies that it will introduce a phone any time soon, but experts say it should.

"Microsoft's only chance is to build a phone," said Satoshi Nakajima, president of Big Canvas, an iPhone application development startup, who spent more than a decade at Microsoft. If Microsoft were to package hardware and software, much like its Xbox effort, it could better control the end result and potentially earn more revenue than it does on Windows Mobile, he said.

But Microsoft, which has historically said that it won't release its own device because it would compete with its phone manufacturer customers that use Windows Mobile, said not to count on an announcement. "Microsoft has no plans to make a phone. Our core focus has been and will continue to be providing software plus services and working with our partners to deliver great phones. Our partners have been integral in our success to date, and we are excited about the innovation we are bringing to the market together," it said in a statement.

Microsoft shouldn't let the competitive issue hold it back, some say. If Microsoft clearly differentiates its phone, which would be based on software from recently acquired Danger and incorporate the Zune and potentially Xbox gaming functions, as squarely targeted at consumers, it might convince Windows Mobile phone makers that it doesn't compete, Nakajima said.

Microsoft could further distance the new platform from Windows Mobile by spinning out a consumer focused company that includes Xbox, Zune and Danger and produces the consumer phone, Nakajima suggested.

Indeed, if Microsoft clearly defines a new phone or software platform as aimed at consumers, it can placate Windows Mobile customers, said Avi Greengart, an analyst with Current Analysis. "There's no doubt it makes sense," he said, of a Microsoft phone that combines Danger, Zune and potentially Xbox functions. "They'd have an advantage in controlling the hardware and software," he said.

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