An ugly rumor is starting to make the rounds again, and it doesn't involve any of the Lohans.

Microsoft (NASDAQ:MSFT) is talking about adding to its fledgling Zune media player to create a Zune smartphone, according to website jkOnTheRun. A reader -- who unsurprisingly wishes to remain anonymous -- tipped off the popular mobile-technology blog and claimed that Microsoft is meeting this week to discuss the project.

Buy it? Me, neither. The story smells fishier than a tilapia taco. However, in announcing this week's reorganization to Microsoft employees, Steve Ballmer did mention something that stuck out to me. 

"We're changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises," Ballmer noted in his corporate memo. "We'll do the same with phones -- providing choice as we work to create great end-to-end experiences."

Yes, this probably refers to working with handset providers to broaden the reach of Mr. Softy's mobile operating system platform. However, it came in a comment about Microsoft's ability to compete with Apple (NASDAQ:AAPL), and we all know how Apple excels at providing "end-to-end experiences" these days. It makes sure it has its hand in both software and hardware.

A history of hangups
ZunePhone rumors aren't new. Seth Jayson has been talking about the concept for more than a year. With Zune's market share standing at a piddly 4% of portable media players earlier this year, despite two incarnations, what's left for Microsoft to lose? The Zune has sold just more than 2 million units in two years on the market, while Apple sold a million 3G iPhones in just three days. Besides, Microsoft already squandered its dignity with the laughably unhip brown Zune.

"Walk away from the Zune, Microsoft," I wrote two months ago. "There are only two scenarios in which I can see this as a battle worth fighting: one, if this is the platform that will be used to take on your video game console rivals in the portable handheld market; or two, if it will bring something new to the wireless communications space. If the Zune is going to evolve into the next DS or PSP, blessed with a ton more storage capacity, great. If this is going to be a cell phone, in a brazen attempt to take on the iPhone, at least you have a strong enough mobile-operating-system pedigree to have a shot."

In an ideal world, the new device would be all three: a media player, a smartphone, and a portable gaming device. Its two rivals in the console space -- Sony (NYSE:SNE) and Nintendo (OTC BB: NTDOY.PK) -- have their feet in both gaming platforms. Why should Microsoft be the only one peg-legging it? A souped-up Zune would also provide an easy way to get the device back into GameStop (NYSE:GME), which unceremoniously booted the player from its shelves earlier this year.

No geek love for Mr. Softy
Microsoft will never be as cool as Apple. It will never get the blind critical praise or have the crowds camping out in front of stores on release days. However, the Xbox -- and now the Xbox 360 -- show that the faithful can show up for Microsoft on the hardware side. That's something that even Google (NASDAQ:GOOG) lacks -- last year's GPhone handset rumors ultimately yielded just a software platform.

And the success of Research In Motion's (NASDAQ:RIMM) BlackBerry -- 14 million subs strong, and counting -- shows that you don't have to be a handset vet or a hipster like Apple to score. You just need to aim well.

A sense of entitlement has plagued Microsoft over the years. As the operating system of choice in the home computer, Microsoft hasn't had to try hard to achieve success with Windows, Office, or Internet Explorer. All the company has to do is show up.

However, as it surrenders market share to Google in search and Apple in portable media players, it's learning that life isn't always easy. Microsoft will have to earn its way with the Zune, the way it did with the Xbox.

This is why I don't give Microsoft much of a chance in this pie-in-the-sky scenario, unless the ZunePhone is shackled to core 360 owners. Anything less, and it's just going to embarrass itself again.

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