Microsoft (NASDAQ:MSFT) will release its Windows Phone 8.1 update on June 24. The most closely watched of its new features is Cortana, Microsoft's virtual assistant rival to Apple's (NASDAQ:AAPL) Siri and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Now.

Cortana was cleverly named after Master Chief's beloved AI sidekick from the Halo video game series, which has sold 57 million copies since 2001. But Cortana has proven to be more than a marketing gimmick, since initial tests suggest that it is easily comparable to Siri and Google Now.

Image

Cortana in Halo 4. Source: Microsoft.

Despite its clumsy beginnings, the use of voice recognition software has been steadily rising. According to a July 2013 survey from Forrester Research, 46% of information workers with smartphones used voice recognition apps for searches, 40% used them for navigation, and 38% used them to take notes. That means that there's certainly a growing market for Cortana, Siri, and Google Now.

However, Microsoft must answer three critical questions about Cortana first -- if it's superior to Siri and Google Now, if it will ever launch on iOS and Android, and if it will finally make Bing's ecosystem a worthy competitor to Google's.

1. How Cortana stacks up to Siri and Google Now
In a head-to-head test on CNET, Cortana easily matched Siri and Google Now's performance for most common voice searches.

Moreover, the three-way comparison showed that Apple's Siri was the weakest of the three services. Siri had trouble returning direct flight results, music identification, or automatic directions to an address when asked, but Cortana and Now handled the requests with ease. Like Google Now, Cortana includes a feed of interest and location based interests such as headlines and weather.

Images

Cortana for Windows Phone. Source: Microsoft.

Cortana also offers several unique features that set it apart from Siri and Now. Cortana is the only service that asks the user to set relationships with contacts, allowing the user to simply refer to contacts as "mom" or "dad" rather than their full names. Cortana also allows the user to dictate contextual and location-based reminders, such as "The next time I go to Kroger, tell me to buy milk."

Cortana's functions can be tweaked via a settings menu called Cortana's Notebook, which allows users to set interests, find frequently visited places, and check reminders. Cortana can also set the phone to "Quiet Hours" at night, during which all functions are muted except for calls from members of a user's "inner circle."

2. Will Microsoft release Cortana for iOS and Android?
Cortana might be a great product on its own, but it will only make a limited impact on the market if it remains exclusive to Windows Phone devices.

Windows Phones only accounted for 3% of the global smartphone market in 2013, according to research firm Gartner. Meanwhile, Google Android claimed 78% while Apple's iPhone ended the year with 16%. Google Now's greatest strength is that it can be installed on both Android and iOS devices, giving it the potential to reach 94% of the world's smartphone users.

Therefore, Cortana can never live up to its full potential without expanding beyond Windows Phones. Yet when a Microsoft manager merely hinted that Cortana could compete against Siri and Now on iOS and Android, a massive social media backlash, dubbed "Cortana-gate," ensued. The reason was that Windows Phone users, long accustomed to getting dated apps released years after their iOS and Android counterparts, had thought that Cortana would finally be an exclusive feature for Windows Phones.

So Microsoft now faces a difficult choice -- should it risk alienating its precious sliver of the smartphone market by expanding Cortana to iOS and Android, or will it try to use Cortana to drive sales of Windows Phones instead?

3. Will Cortana turn Bing into a Google-killer?
Most importantly, Cortana represents a golden opportunity for Microsoft to finally grow Bing's search engine market share and ecosystem.

At the end of May, Bing claimed 18.8% of the U.S. search market, compared to 67.6% for Google and 10% for Yahoo!'s (NASDAQ: YHOO). But investors should remember that Yahoo!'s search engine is actually powered by Bing, due to a 10-year deal signed in 2009. As a result, Bing actually controls 28.8% of the U.S. search market.

Bing's footprint gets even bigger when we consider that Bing is the default search engine for Apple's Siri in iOS 7. This means that most voice searches in Windows Phone and iPhones are processed by Bing instead of Google. Windows Phone and iPhones control a 47.7% combined share of the U.S. smartphone market, making Bing much more of a threat to Google back at home than abroad.

Based on Google's past actions against Microsoft -- which include temporarily blocking access to the mobile version of Google Maps and Microsoft's YouTube app -- it's unlikely that Google will ever launch Google Now on Windows Phones. This means that Cortana will have no real competitors (except for cross-platform services like Indigo) on Windows Phones.

Over the past year, Bing's ecosystem has grown considerably, with additional services such as Bing Maps, Health & Fitness, Travel, Sports, News, and Finance. Making Cortana the all-in-one assistant that ties all of these apps together will increase user dependence on the Bing ecosystem. That would lead to higher traffic for Bing, which fueled Microsoft's 38% year-over-year jump in search advertising revenue last quarter.

The Foolish takeaway
In conclusion, Cortana is much more than a rival to Siri and Google Now -- it represents a new reason for consumers to buy a Windows Phone and could become the voice of the Bing ecosystem.

Microsoft would be wise to keep Cortana as an exclusive feature for Windows Phones. It already has a solid foothold in the U.S. search market via its partnerships with Yahoo! and Apple. The appeal of taking the fight to Android phones by replacing Now with Cortana seems tempting, but it would be foolishly done at the expense of diluting Windows Phones' tiny share of the smartphone market.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Leo Sun owns shares of Apple and Google (C shares). The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Yahoo. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Microsoft, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.