The smartphone threat is ringing at Microsoft (NASDAQ:MSFT). Is it brave enough to answer?

Buzz over a Microsoft-branded handset is building, with The Inquirer claiming that a Microsoft-branded smartphone will be introduced in February. The unidentified sources don't have the specs, beyond noting that it will be powered by NVIDIA's (NASDAQ:NVDA) Tegra chip. The processor would give the device groundbreaking video playback quality, but won't that come at the expense of sucking up battery life?

This is all rumor mill fodder until Microsoft or NVIDIA make it legit. It's pretty much inevitable at this point, though.

Calling in slick
Zune Phone chatter is nearly two years old. Talk heated up again earlier this year, as Apple (NASDAQ:AAPL) rolled out its 3G iPhone, Research In Motion (NASDAQ:RIMM) gave a multimedia upgrade to its BlackBerry, and Google (NASDAQ:GOOG) jumped into the fray with its Android platform for handset makers.

Microsoft has no choice but to slap on its swim trunks and dive right in. If this is where Google and Apple are swimming these days, Microsoft can't ignore its two biggest rivals when more than just the future of its mobile operating system is at stake.

Acquiring Research In Motion, now trading for less than a third of its 52-week high, would be the ideal solution. It's a perfect match, with BlackBerry's growing base of 19 million subscribers. Since BlackBerry appeals to the corporate crowd given the appliance's email smarts, it's the ripe target audience for Microsoft and 19 million fewer obvious customers that it has to win over.

Microsoft can't afford to play it safe here. Its very presence will spook its Windows Mobile handset partners, even if the company ultimately teams up with one or more to make it happen like Google has.

The Xbox factor
The real prize here is going for the knockout blow, but that's easier said than done when you're competing against Apple and Google.

It doesn't help that Microsoft is also, well, Microsoft. As far as corporate brands go, Microsoft is about as cool as a sauna. The Zune media player is a noble shot at street cred, but the gizmo had just a tiny 4% sliver of the market according to NPD Group earlier this year.

The real killer app for Microsoft would be hog-tying a wireless device to its Xbox 360 franchise. After all, Microsoft is the only video game console maker without a portable gaming device. Nintendo (OTC BB: NTDOY.PK) owns the market with its DS. Sony (NYSE:SNE) has been a feisty silver medalist with its PSP. Where is the portable Xbox?

"Transforming the Zune into a cell phone or portable video game player may not be enough, though at least it would get customers talking again," I suggested back in May. Rebirthing the lethargic Zune into a gaming device would get it back into retailers that have booted the fringe device. Putting out a smartphone with Zune functionality would be the bare minimum of a response to Apple's iPod-backed iPhone.

So why can't Microsoft put it all together and create the triple threat? Why can't the "mPhone" be a multimedia player, a handheld gaming system, and a Web-smart cell phone? It's a lot to ask in a product, but if Microsoft is going all-out with state-of-the-art NVIDIA graphic chips as The Inquirer claims, it's already aiming for a younger crowd hungry for eye candy.

Teen gamers can't afford smartphones with costly data subscription plans? The Zune is such a sorry ecosystem that it will hurt sales? All of this still won't pry an iPhone out of your hands?

You're asking the right questions. It's Microsoft's job to drum up the right answers.

The Zune Phone rumor never seems to die:

 

Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. NVIDIA, Nintendo, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is proud to say that he never bought one of those brown Zunes, but he knows someone who did. Hdoes not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.