I’m trying to understand the math. Dan Frommer in Silicon Alley Insider:

What’s the biggest difference between Microsoft’s newest mobile operating system and the Google version that it will be competing against?

I dunno. What?

Microsoft will charge carriers for its OS, while Google is giving Android away for free. (The other big competitors, Apple and RIM, don’t license their operating systems to third parties.)

In other words, Apple and RIM (BlackBerry) sell handsets and include the operating system. Google gives away Android to any cell phone handset maker. Free. Microsoft wants to charge for Windows Phone 7 Series. Frommer again:

That’s just silly. Microsoft is dead in the water in this business. If it wants to get moving again, it needs to do everything it can to help itself. And in mobile software, that means competing with free with free.

How can Microsoft make money in the smart phone market?

Instead, Microsoft should give Windows Phone software away for free, with the hope that manufacturers will use it to make more Windows phones than they’re previously planning to make, that they’ll charge lower wholesale prices for them, and that carriers will charge lower retail prices for those phones. That could drive up Microsoft’s market share, with little negative effect on Microsoft’s financial situation.

The numbers don’t add up. Even if Microsoft can get a $20 per cell phone sold for Windows Phone 7 Series, they would have to sell more units than Apple’s iPhone (average selling price is over $500) and still never crack a billion dollars in revenue (vs. Apple’s $15-billion in 2009). How can Microsoft make money?

The options range from taking a cut from selling mobile applications, to subscription fees for Xbox live and Zune music accounts, to mobile search and display advertising, via Bing and potential ad network acquisitions. Sure, those revenue streams will be minuscule to begin with, too. But they will grow with time, and with a bigger user base, which the no-license-fee phone business should provide. Or Microsoft could take the route that Apple, Research In Motion, Nokia, Palm, and others take, which is selling their own hardware and software.

This has all the makings of a slow motion train wreck.