Microsoft Floats Idea of Zune-Based Cell Phone

SEATTLE – Microsoft Corp. (MSFT) said on Tuesday that it is "not unreasonable" for the company to introduce a mobile phone combined with features of its Zune digital music player to compete with Apple Inc.'s (AAPL) iPhone.

The Zune phone, a topic of speculation for months since Microsoft introduced its first digital music player last year, could be driven by consumer demand for one multimedia device to make phone calls, play music and take pictures.

To date, the focus of Microsoft's mobile phone business has been providing its Windows Mobile software to handset manufacturers, but the company said an integrated business model of making both device and software could make sense.

"It wouldn't be unreasonable to think at some point there might some integrated thing," Mindy Mount, chief financial officer of Microsoft's entertainment and devices division, told investors at Citigroup's global technology conference.

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Microsoft has sent mixed signals about the Zune phone. At the time it introduced the Zune last year, the company said a Zune phone was definitely part of its future plans.

Earlier this year, Chief Executive Steve Ballmer said at a CEO forum that the Zune phone is not a concept that Microsoft would ever pursue. But he then said it could easily add music or gaming functionality to its Windows Mobile platform.

Windows Mobile is one of Microsoft's fastest growing businesses with license sales expected to nearly double this fiscal year to more than 20 million copies.

It remains a product largely targeted at office workers, but Mount expects that to change as consumers push to combine work and personal needs onto one handset. She said she was not making any specific announcements about its future products.

Mount declined to comment on rumors that Microsoft may buy BlackBerry-maker Research in Motion Ltd. (RIMM), but said the company is happy with its future in mobile right now.

"What I would ask people is what (RIM) really gets you. A lot of their money is coming from the hardware business and they are going after a very particular segment," said Mount, whose division also oversees the Xbox game console and Zune music player business.

Mount also said the mobile strategy of the two companies is quite different.

Microsoft has been focused on building scale by rolling out Windows Mobile to as many different devices and operators as possible while RIM, according to Mount, has been focused on being profitable with its limited number of handsets.

Shares of Microsoft rose 33 cents to $29.06 in afternoon Nasdaq trade, while RIM shares touched a new high of $85.88 on the Nasdaq before dropping back to $85.55, up 14 cents.