software, and the same week it announced an own-brand tablet, signaling a break with 37 years of focusing on software and leaving hardware manufacturing to its partners.
A variety of logos hover above the Microsoft booth on the opening day of the International Consumer Electronics Show (CES) in Las Vegas. Credit: Reuters/Rick Wilking
"Our industry sources tell us that Microsoft may be working with a contract manufacturer to develop their own handset for Windows Phone 8," wrote Nomura analyst Rick Sherlund in a note to clients on Thursday.
"It is unclear to us whether this would be a reference platform or whether this may be a go-to market Microsoft-branded handset," wrote Sherlund, who covered Microsoft for Goldman Sachs when the bank brought Microsoft public in 1986.
Microsoft did not confirm or deny the speculation. A spokesman said the company was a "big believer in our hardware partners and together we're focused on bringing Windows Phone 8 to market this year."
Windows Phone 8 is the latest version of Microsoft's mobile software, set for release in autumn. So far, the software giant has struggled to make a mark, with Windows-powered smartphones taking only 2 percent of a worldwide market dominated by Apple Inc's iPhone and devices running Google Inc's Android system.
Microsoft built its business on creating software to be used on other companies' hardware, but the success of Apple's iPhone and iPad have demonstrated that making both and integrating the two smoothly has its benefits.
Microsoft charted a new course this week by announcing two own-branded tablet PCs, although doubts remain whether that was a move to invigorate hardware makers or a genuine attempt to compete with its partners.
A similar move in phones could make sense, and the company has little to lose by trying its own handset, said another analyst, considering the strategic importance of smartphones and poor sales of Windows phones.
"Microsoft can't afford not to have phones sell. They have to find a way of selling it," said Sid Parakh, an analyst at fund firm McAdams Wright Ragen. "It's a significant piece of their long-term vision of integrated devices."
If Microsoft did make its own phone, it would be a blow for struggling Finnish handset maker Nokia , which pledged to use Windows software in its smartphones under a multi-billion dollar pact last year. If Microsoft wanted to be in the handset business, it might even consider buying Nokia, suggested Parakh, although he said that was unlikely.
Such a move would also bring Microsoft into competition with Samsung Electronics <005930.KS>, HTC Corp <2498.TW> and Huawei, which are slated to bring out new Windows phones later this year.
Microsoft has experimented unsuccessfully with handsets before. It bought fashionable phone designer Danger and developed a phone in-house called Kin, which was pulled off the market months after launch in 2010.