One of the biggest stories of the past year has been Microsoft's fading fortunes in the smart phone market. Since mid-2007, Microsoft's Windows Mobile OS has failed to keep up with more innovative devices from Apple, RIM, Palm and Google, and has lost both mindshare and marketshare. The release of Windows Mobile 6.5 in late 2009 was met with scorn by reviewers and analysts, and many called for Microsoft to get out of the smartphone market for good or perhaps poach technology from a competitor such as Palm.

But Microsoft has a plan to save Windows Mobile. And it just may work.

To understand what the company is doing, one must first understand that the Windows Mobile group at Microsoft underwent a drastic realignment last year that mirrors a similar and previous reorganization in the Windows Division (the latter of which resulted in the well-received Windows 7 for PCs). Realignments are hard on any organization, and the Windows Mobile group understood that it needed to deliver something quickly to help counter the competitive threat from Apple and others. So Windows Mobile 6.5 was slipstreamed into the schedule so that the company's partners could ship new products before the oft-delayed Windows Mobile 7.

The problem with the initial shipping version of Windows Mobile 6.5, however, is that it does not constitute the complete vision for that release of the product. That is, Microsoft shipped what it could in the limited amount of time it had to meet the holiday 2009 selling season. But Windows Mobile 6.5 as shipped in late 2009 is not complete, and the software giant has continued working on updates to that system, updates that are now being delivered over time.

Two of these updates are notable, and by the second quarter of 2010, we will see a more complete vision of the 6.5 release. The first comes with the HTC HD2 smartphone, a gorgeous device with an 800 x 480 capacitive touch screen. Previous to the HD2, Windows Mobile 6.5 didn't support capacitive touch screens, which were first popularized by the iPhone (and are also used by Google Android devices). These types of screens are much easier to use then the resistive touch screens used by first generation Windows Mobile 6.5 devices, the latter of which require more pressure and often result in mistaken finger tap selections. Many of the complaints about early Windows Mobile 6.5 devices are in fact related to this problem, and capacitive screen compatibility will begin appearing in non-HD2 devices throughout 2010.

The second Windows Mobile 6.5 update--sometimes referred to as Windows Mobile 6.5.3 in reports from the 2010 Consumer Electronics Show (CES)--answers the second major complaint about the latest release of Microsoft's smart phone system. That is, while Windows Mobile 6.5 does support touch and multitouch, and includes nice finger-friendly surface user interfaces, you don't have to dig too deep into the system before you run into decades-old UIs that were originally designed for stylus taps. These UIs actually predate Windows Mobile and were originally designed for the PocketPC and Windows CE devices of the 1990s. Yes, they're still in Windows Mobile.

Beginning with Windows Mobile 6.5, however, they won't be. Delivered with a new generation of devices later this quarter, Windows Mobile 6.5.3 (or whatever) finally replaces those ancient, lower-level UIs with finger-friendly buttons and menus. And Microsoft has also built on the new surface UIs from Windows Mobile 6.5, adding friendlier new interactions. Thus, with Windows Mobile 6.5.3, Microsoft will finally deliver the experience it originally intended and would have shipped as 6.5 had it had more time to do so. More to the point, with Windows Mobile 6.5.3 and a new generation of capacitive touch screen-based devices, Microsoft finally has a credible system with which it can compete against the iPhones, Blackberries, WebOS devices, and Androids of the world.

Of course, the mobile industry isn't standing still, and the competition, most notably Apple, will be shipping major new mobile OSes and devices this year. So too, will Microsoft and its partners.

Little concrete information is known about Windows Mobile 7, but Microsoft will formally unveil this system in February at the Mobile World Congress in Barcelona and then divulge more technical information in March at its MIX'10 conference in Las Vegas. Expectations for Windows Mobile 7 are high, and even Microsoft has been uncharacteristically enthusiastic about the release given how little it's actually said about the system.

Currently we expect Windows Mobile 7 to ship by the end of 2010, but it's unclear if that means just the OS or an actual selection of devices. (Typically, Windows Mobile releases pre-date device availability by several months.) One thing to expect is a move to more of an iPhone-like updating model, where Microsoft is directly involved in delivering OS updates to customers instead of letting wireless carriers make that decision. The reason is simple: Via a Windows Update mechanism, Microsoft can easily deliver innovations as well as security updates to its customers. Wireless carriers would rather sell users a new phone than given them a free or inexpensive software update.

Microsoft is also getting more involved with the design of devices, though the company denies long-standing rumors that it will sell its own branded phone (as Google now does). "We've been too focused on how many devices we could have and not focused enough on making sure that the base quality of those devices is very strong," Microsoft Entertainment and Devices Division president Robbie Bach said last week. "So one of the things we are working on with our partners is ensuring that those experiences are consistent and work great and that the base line that you start with is always rock solid."

So while Windows Mobile 7 is still mostly a mystery, 2010 should prove to be an important, even watershed, year for Microsoft's smartphone entry. For the first time in a long time, I feel that Windows Mobile actually has a fighting chance. I can't wait to see what happens next.

This article originally appeared in the January 11, 2010 issue of WinInfo Daily UPDATE. --Paul