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Next to Enter the Smartphone Race: Microsoft?

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Evidence emerges of an upcoming Zune phone.

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As if the tenuous alliance between Microsoft (MSFT) and Apple (AAPL) didn't seem strained enough (see Why Bing on the iPhone Could Be Merely Symbolic), Microsoft may be entering a territory that left Google (GOOG) on the outs with the iPhone makers.

Upon the release of this week's Zune software update, tech blogger Long Zheng spotted a line of code that hints at an unknown and unreleased Zune line. And based on the parameters within the new driver file, it could mean as many as three new Zune models.

But here's the kicker: The file outright uses the string "Phone.Device" -- as opposed to the common identifier "Zune.Device." Coupled with the timing of the Mobile World Congress conference in Spain next month, the rumors of a Zune phone being announced or even unveiled soon have been given more legitimacy.

The timing, however, is also the hypothetical Zune phone's biggest enemy.

If Microsoft were to design -- directly, or by proxy -- a Zune phone in 2010, it will have to bear the verbal slings and arrows as both an iPod also-ran and an iPhone wanna-be. Already, the Zune is the inescapable target of jokes by the largely biased iPod community, despite the notable improvements the company has made in the Zune HD. But to take on an enterprise that even Google couldn't flawlessly tackle with its messy Nexus One release, Microsoft will have a lot on its plate. The competition, as well, has never been more daunting.

And there's the matter of the manufacturer. Is Microsoft capable of designing a smartphone? Emil Protalinski of Ars Technica and Matt Rosoff of CNet both predict that while the device will carry the Windows Mobile 7 OS and possibly Zune media player software, it won't be a Microsoft-manufactured phone -- a theory that corroborates with the stance long held by the company that it's not in the phone-making business.

However, David Worthington at PCWorld cites Microsoft's acquisition of Sidekick creator Danger Inc. -- as well as good ol' fashioned competition with Apple -- as evidence that it could very well make its own Zune phone. Jefferies & Company analyst Katherine Egbert went so far as to actually predict some specs for the device -- referencing a five-megapixel camera, hi-def video, and a music subscription service. While Worthington's outlook may seem reasonable, Egbert's speculative features seem like a shot in the dark without any proof to back it up.

But despite Zheng's damning evidence, the Zune folks are sticking to their story. In response to an inquiry made afterward by Mary Jo Foley at ZDnet, a Zune spokesperson responded:

"The update was only maintenance and nothing consumer facing. As far as a 'Zune phone,' we have no plans to create a Zune phone. It makes sense that someday Zune could be part of a phone experience, but there have been no announcements about how or if that will happen."

Looks like we'll all have to wait and see what comes up next month in Spain.
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