Microsoft's second big announcement

It's been a big couple of weeks for Microsoft (Nasdaq: MSFT). To start with, the software giant took the wraps off of its big plunge into tablet hardware with Microsoft Surface, which runs on the next major version of its flagship operating system, Windows 8.

Then, the company detailed the next version of its smartphone operating system, Windows Phone 8, at its Windows Phone Summit event. Within a matter of days, Microsoft has now outlined its vision of the next year or so in terms of its big hardware and software initiatives in its most important markets.

A recurring theme
An important trend on the operating system front has been a continued convergence of features and capabilities between desktop, tablet, and smartphones. Apple (Nasdaq: AAPL) began bringing features from iOS into its Mac OS X in 2011 with Lion and is set to keep that theme alive with Mountain Lion next month.

Mr. Softy unveiled Windows 8 in September of last year and it was obvious that it was taking many design and interface cues from the metro style it pioneered in Windows Phone 7. The company is going deeper this time with its convergence, as the core technologies of Windows Phone 8 are based on Windows 8, and the two operating systems will share a lot of the same code base, including its underlying kernel.

The most obvious benefit of doing this is that it makes it easier for developers to make apps across all devices.

What's new?

As far as new features go, Microsoft is adding a swath of new features, including NFC, multi-core processor support, a new start screen interface, Skype and VoIP integration, and a new digital wallet feature, among others.

Windows Phone 8 start screens. Source: Microsoft.

The start screen is now more customisable and flexible, allowing better utilisation of screen real estate, which is particularly useful as smartphone screen sizes are trending larger nowadays. Developers will have more access to how the characteristic live tiles behave.

The wallet feature is one-upping both Google (Nasdaq: GOOG) and Apple. It's pretty much exactly what it sounds like, a digital wallet to process payments and keep track of information you usually carry around with you. Google has long had NFC payment processing with Google Wallet, and Apple's recently announced Passbook app aggregates cards and tickets and such, but Microsoft's Wallet will do all of the above. Microsoft's Greg Sullivan said, "Google has the NFC payment part, Apple has the Passbook thing, we'll have both."

It's not quite 8 yet
Here's the real kicker in the announcement: Existing Windows Phone 7 devices will not be upgradeable to Windows Phone 8. Instead, existing users will get an update to Windows Phone 7.8, which will feature some of the interface changes and various unnamed "core customer experiences."

Microsoft justifies this decision by saying that many of Windows Phone 8's biggest changes are hardware related and existing devices simply don't have the hardware in place for the software to take advantage of, such as multi-core processors or NFC chips.

That means that Nokia's (NYSE: NOK) Lumia 900, the current Windows Phone flagship and likely among the better selling Windows Phones out there, is now stuck in a rut, frozen in the mobile timeline. Naturally, the Finnish smartphone maker is brushing off concerns, with exec Kevin Shields saying, "I think that ultimately your typical customer probably isn't all that aware of this upgrade thing." That's like saying, "What they don't know can't hurt them!"

The lack of upgradeability has even led T-Mobile's German division to stop carrying the Lumia 900 since users would likely take out their anger on the carrier that sold them the device.

The fall of Windows Phone
Windows Phone 8 should be available later this year, which is about when existing users can expect an upgrade to Windows Phone 7.8. The OS is facing a daunting uphill battle against iOS and Android, though, which rose to 23% and 59% market share, respectively, in the first quarter, towering over Microsoft's 2.2%.

Mr. Softy has its work cut out in gaining mobile share, but overall its business model has allowed it to dish out dividends for going on ten years.

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