Even Microsoft Chairman Bill Gates acknowledged this week to an OMG moment when he first saw the iPhone. In an interview with business Web site Bnet, Gates recalled when he first saw the iPhone, he said, "Oh, my god, Microsoft didn't aim high enough."
On Monday, the company hopes to regain some footing with an announcement at the World Mobile Congress trade show in Barcelona, Spain, that will feature CEO Steve Ballmer. Many expect Ballmer will release Windows Mobile 7.0, a new version of its operating system for smartphones.
"It can't be incremental improvement; it's got to be something bigger," said Will Stofega, a mobile-device analyst at IDC, a research company in Framingham, Mass. "We can't see another Windows Mobile 6.5.3.2."
Microsoft's lack of progress in the mobile-phone business, now a hot pot of app development, is having a black-hole effect, sucking the rest of the company's reputation for innovation down with it.
No matter what bells and whistles Microsoft adds to Windows 7 or Xbox, some see the company as a technology has-been because it has no answer to the iPhone.
"Even the people at Microsoft would be hard-pressed to defend the state that it's in now," Stofega said.
Deborah Sommer, senior marketing manager of the Microsoft mobile group, said in a statement Thursday: "The market for powerful phones has shifted dramatically over the last three years, reflecting changes in the customer, the technology and the competitive landscape. We're excited about the current generation of Windows phones and the experiences they bring to life today."
At this point, just catching up would be a leap forward.
From 2008 to 2009, Microsoft's slice of the smartphone operating-system market shrank from 13.1 percent to 10.7 percent. Meanwhile, Apple grew from 9.1 to 14.4 percent, and Google's Android system started with half a percent and grew to 3.5 percent, according to IDC. Research In Motion, maker of the BlackBerry, rose to 19.6 percent from 15.6 percent.
By the end of this year, Google is projected to jack-rabbit to 10.3 percent.
Over the last three years, Microsoft has mostly stood by as other companies came out with new devices and features.
In February 2007, at the same trade show in Barcelona, Microsoft released Windows Mobile 6.0. At the time, its main competition was RIM's BlackBerry and Symbian, used largely by Nokia. The new features in Windows Mobile included the ability to view photos in e-mail and edit Microsoft Office documents.
A month earlier, Apple had overshadowed every other player in the mobile market with the iPhone. The touch-screen with pinch-and-pull interaction changed Web browsing on a phone, and the iTunes-like application store attracted thousands of developers.
"I think the iPhone kind of caught them (Microsoft) by surprise," said Matt Rosoff, an analyst at the independent research firm Directions on Microsoft, based in Kirkland. "I think they thought it would appeal to the same people who buy Macs, which is 4 to 5 percent of the market."
In fall 2007, Google came out with Android, its own operating system for mobile phones. The first Android phone started selling about a year later.
The company was on track to produce about a dozen devices - all carrying the brand names of mobile phone carriers - by the end of 2009. Then in January, it introduced its own branded phone, the Nexus One.
Last October, more than two years after the launch of Windows Mobile 6.0, Microsoft released an incremental update, Windows Mobile 6.5. It also re-branded phones with a slightly more consumer-friendly name "Windows Phones."
The update had new features, such as the ability to back up contact information online, and a new marketplace for applications. Reviewers panned it.
Microsoft suffered another blow when users of the Sidekick, a T-Mobile USA device whose services are run by Microsoft subsidiary Danger, lost their contacts and other data for several weeks. They publicly ranted about it on Twitter and other social networks for just as long.
Observers say Microsoft still has some advantages, such as its strong ties with corporate customers through its other businesses. Phone users tend to replace their handsets every two to three years, giving any company room to reinvent.
Microsoft so far has also differentiated itself from competitors by neither building a device from soup to nuts like Apple nor going the open-source route like Google.
Some have suggested Microsoft catch up by spending handsomely to buy RIM, valued at about $37.6 billion, or Nokia, which is worth about $48.5 billion.
The last time Microsoft tried to purchase a major publicly traded company, Yahoo, it spent months in an attempt that never came together and ended in a partnership instead.
IDC's Stofega doesn't think Microsoft needs to buy a company. He points to Google as an example of a company that built a niche in the market without buying a handset maker.
As Jack Shephard said on a recent episode of "Lost," nothing's irreversible.
"There's a lot of people that have counted them out," Stofega said. "I don't. I think they have work to do.
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