Microsoft Not Planning to Sell a Phone ... For Now: Sources

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Is Microsoft making its own smartphone?

Yes and no.

Yes in the sense that the software giant has a hardware group that makes prototype devices – often, these end up helping Microsoft's licensees bring hardware to market.

But is Microsoft planning to sell its own smartphone, the way it's planning to sell the Surface tablet? No.

That, at least, is what Microsoft executives have begun whispering to its partners, I'm told. A note from Rick Sherlund at Nomura Holdings yesterday said Microsoft may be using the same manufacturer that's building its tablet to make a phone as well. Sherlund says it's not clear whether the phone would be for sale, or a reference design to help device makers who want to use the Windows Phone 8 operating system.

There's a lot at stake in the approach Microsoft takes. If Microsoft does end up making its own phone, it could end up discouraging partners like Dell , HP , Nokia and Samsung from building their own hardware around the Windows Phone 8 operating system. Why pay Microsoft for technology the software giant will turn around and use against them? But if those partners don't start selling more innovative hardware that connects with consumers in the next year, Microsoft might have little choice.

One particularly important market segment: low-end phones. Microsoft needs to devise a way to get the most current version of its software to run on low-end hardware that will sell in emerging markets, and to prepaid customers, without building a completely separate operating system. Once it does that, it'll have to have a partner ready to make the phones. (Huawei and Nokia seem like natural possibilities.)

But if Huawei balks and Nokia isn't far enough along in its turnaround by next spring, who knows? A Microsoft phone could be closer to reality.