The bright spot in Microsoft's mobile OS disaster is...

...There's no place to go but up. But up doesn't have to be an arduous climb.

That's the attitude Microsoft product managers and marketers should adopt when launching Windows Phone 7. Microsoft has been humbled by upstarts Apple and Google; from that admission comes a fresh start. Windows Mobile has already lost the major battles of the mobile phone wars. Windows Phone cannot win if Microsoft plays by the rules set by its adversaries. The company must instead engage guerilla tactics, starting by leveraging off core strengths -- and Xbox gaming and mobile Office simply aren't enough. This kind of thinking might yet pull Microsoft out of the mobile OS gutter.

Bottom is an ugly place to be, but there's only one direction to go, eh? According to Gartner, Microsoft will sell 12.69 million mobile OS units this year, down 2.34 million units from 2009. By 2014, Gartner predicts only 34.5 million Windows Phone OS sales. By comparison, Android will go from 6.8 million in 2009 to 259 million units in 2014, or 7.5 times more than Microsoft's mobile operating system four years from now. During Q2 2010, like the previous quarter, Microsoft ranked No.5 in smartphone OS market share. However, the Gartner forecasts just stated are for the entire global handset market. The "other" category, which Gartner asserts will fall just below Microsoft this year, will be 2.5 times larger in 2014. But already, by next year, Windows Phone will rank sixth in market share behind "other." How low the mighty has fallen.

Even the fallen can rise to greatness. Apple was a near-death case in 1996, with many people asking: Should the board of directors pull the life support plug and give the organs to shareholders? Now look at Apple, with market capitalization greater than Microsoft's, which stock closes on a record $300 a share and products are hot, hot, hot. If Apple can achieve such greatness with so much less than what Microsoft can bring to bear, Windows Phone can yet push upwards from the bottom. After all, Microsoft isn't a company teetering on the edge of collapse like Apple was in the mid 1990s. Microsoft generated $18.76 billion in net income off $62.48 billion revenue during fiscal 2010.

It's Time for "David Thinking"

December 2009 post "Why Apple succeeds, and always will" used an audacious headline to make a point: The company doesn't play by the rules but sets new ones that favor its strengths. Apple applies what I call "David Thinking." In the Biblical battle between David and Goliath, the giant played by one set of rules. David chose to change the rules, which favored his strengths rather than those of Goliath.

In PC operating systems and productivity suite applications -- and increasingly server software -- Microsoft is Goliath. But in search and mobile operating systems, the company is David and shouldn't apply Goliath thinking when competing against Google and other companies.

As I explained in the "why Apple succeeds" post:

At one time Microsoft changed the rules, too, when David to the IBM Goliath. For example:

• Microsoft cofounder Bill Gates admonished early developers in 1976 "An Open Letter to Software Hobbyists." The convention had been to share code, which he called stealing.
• Gates and cofounder Paul Allen licensed what would later be called MS-DOS to IBM in 1981, rather than selling the software. The approach broke the end-to-end hardware/software model and later flourished a robust IBM PC-clone market.
• Microsoft's approach to partnering, particularly software developers and resellers, put more money in others' pockets. In the IBM model, money flowed up. By contrast, Microsoft shared the wealth.

There are many other examples how Microsoft defied convention over the years, how the company changed the rules. No longer. Microsoft seeks to preserve the status quo it established through success and becoming Goliath.

Perhaps "no longer" isn't right. Microsoft's recent product marketing for Bing, Internet Explorer 8 and Windows 7 are examples of exceptionally good advertising that applies David Thinking. For example, Google search is all about keywords. Rather than play the keyword game, Microsoft shows keyword search to be a negative. Bing is the "cure for search overload" and "decision engine" rather than search engine. The connotations are all positive for Bing and negative for keyword search, all without ever using the dreaded "G" word.

Then there is recent history. Before launching Xbox in late 2001, Microsoft was less-than David in the game console market. But the company applied David Thinking to taking on Nintendo and Sony. Among Microsoft's strengths: Assets. The company chose to lose money on every console to gain market share, a strategy that later pushed Xbox ahead of Nintendo (despite early Wii sales successes) and Sony. From games development, to online gaming and to bundles, among other things, Microsoft changed the rules that Sony Goliath played by. And won.

Clearly many people inside and outside Microsoft are looking to Xbox as means of driving Windows Phone 7 sales. Xbox thinking is right, but not leveraging Xbox gaming to Windows Phone 7, which clearly is the current strategy. I'm not suggesting that making Xbox gaming available on Windows Phone is a bad idea. The approach has merits. But if that's as far as it goes, Microsoft can't go far enough to take on competitors, particularly Apple, which iOS gaming has huge tactical and market share advantages. Apple is Goliath in mobile gaming. Leveraging Xbox gaming plays by Goliath's rules.

But Xbox thinking, which is David Thinking, can work. Microsoft's Entertainment and Devices division was built on David Thinking, defying the corporate status quo inside and outside the company. Unfortunately some of the key architects -- the David Thinkers -- have left the company. My concern: Microsoft's attempts to bind Windows Phone 7 to status quo products, like Office and Xbox, will bring the software and its supporting devices to Goliath by his rules. Microsoft cannot win there.

Change the Rules of the Game

So how then should Microsoft change the rules? I have a few suggestions but would like to ask Betanews readers to offer more. For starters:

1. Attitude: Product managers must treat Windows Phone 7's launch as guerilla warfare. Throw out the old rules of engagement. Decision makers must admit defeat and from that humbled position look to different tactical approaches. This suggestion may seem nebulous, but attitude is everything. Without accepting past defeat, key Microsoft decision makers cannot apply David Thinking. They will be burdened by status quo thinking, which for Microsoft means binding everything to Office and Windows.

2. Mindshare: There must be aggressive aspirational marketing that is at least as good as recent Bing, Internet Explorer and Windows 7 advertising. Microsoft's first objective must be building, or perhaps rebuilding, mindshare around the mobile Windows brand. Advertise, advertise, advertise. If Christmas shoppers don't think that Windows Phone 7 smartphones are simply the coolest devices on the planet, Microsoft has already stumbled at the start. First impressions mean everything. Microsoft made the right, positive impressions when rebranding Windows Live Search to Bing -- thanks to supporting marketing. Windows Mobile is dead. Long live Windows Phone. It's a new brand that buyers must rightly meet.

3. Change competitive perceptions: Microsoft should aggressively countermarket "myths" about Android. I'm a big fan of recent Microsoft assertions that "Android isn't free." Pundits scoffed at Microsoft's "Get the Facts" campaign against Linux, but it worked. Microsoft helped change "it's free" attitudes about Linux. Whether or not the open-source software is free doesn't matter as much as the effectiveness of Microsoft's FUD (fear, uncertainty and doubt) campaign. Microsoft could easily do to Android what it did to Linux -- create doubts about costs, security and reliability. People believe what you tell them. Look at recent political polls as example. According to a recent Pew report, nearly one in five Americans think President Obama is Muslim. The point: well-executed FUD campaigns can be hugely successful and believed.

4. Give it away: Microsoft should do to Windows Phone 7 what it did with Xbox -- give up short-term profits for long-term gains. Every Windows Phone 7 smartphone sold in the United States this year should come with affordable unlimited calling, texting and data/Web plans, and Microsoft should subsidize the costs wherever necessary. So when AT&T subscribers compare every other smartphone to Windows Phone 7 handsets, they see a huge advantage: Unlimited everything for the same price as capped plans. Microsoft can make "unlimited" a holiday and launch promotion through December 25. Subscribers keep the promotional plan for as long as they don't switch to another one.

As for the other suggestions, I ask you to make them. How would you advise Microsoft to change the rules in its favor so that Windows Phone 7 can rise from Windows Mobile's market share dearths? Perhaps Microsoft shouldn't even bother with market share but focus on profit-share per phone. Please pipe in with your suggestions. This is your chance to offer Microsoft valuable feedback about Windows Phone 7.