You won't see it at CES, but new a mobile phone initiative is brewing at Microsoft right now, and theteam is involved.
I live in Seattle. I run with the Microsoft/Amazon/Real/Whatever circle of geeks in the area. Sadly, because I'm a technology journalist, this means that when I run into them at parties they often have to clam up. I was, though, fortunate enough to have a sneak peek at a prototype Zune more than two years ago before anyone knew what it would look like or do. I was also lucky enough to snap a shot of it with my Treo. This became the first public photo of the device. It was black and white and wrapped in its own headphones, you might remember it. You could say I broke the Zune. I thus love the Zune. I pay close attention to what the Zune teams are doing. I listen to the Zune rumors. I have my ear to the Zune ground.
And I can tell you this: There will be a cellular communications device with Zune-like features in the near future.
I'm not sure if Microsoft will call it the "Zune phone" (unlikely), or if it'll just be a device that interacts with the excellent Zune Marketplace (likely), or a combo of the two. I'd even expect something like "Windows Mobile, now with Zune!" or something to that effect.
I can also tell you this: Members of the Zune team have been talking with members of the Windows Mobile group. According to multiple sources here in Seattle, some members of the Zune UI team are going to be moving to the Windows Mobile group.
This does not, of course, necessarily mean that it's for a Zune phone--indeed, the Zune interface is far superior to the Windows Mobile interface, so it only makes sense for Microsoft to take what works to make what doesn't work better--but in reality, Microsoft really has to do something against the iPhone. The current crop of Windows Mobile devices just don't cut it anymore, no matter how you dress them up. Windows 98 was cool for its time but now it looks old and outdated. It's a last-gen UI and it shows. The WinMo UI is stuck in the object-oriented world of Windows 98.
Currently, HTC has done a very good job of putting a decent candy coating on top of the mobile OS with its TouchFLO interface, but it's still rather dated compared with the way the iPhone UI handles. It's not HTC's fault; they can only do so much with what the OS has.
Microsoft itself has done some pretty great work in making next-gen UIs both with the Zune and its Surface devices, so it would make sense to take this technology, put it in your pocket, and connect it to its music service.
And if Microsoft can shrink some of the functionality behind the Surface--the object-awareness and scanning technology--into a handset, it could eclipse the iPhone. And it's not all about the interface; indeed, Microsoft has put together a great network of services through MSN, Zune, and its Live initiative. Making these truly mobile could really turn up the heat on Apple.
Microsoft hasn't had a great track record for portable devices until the Zune, but the Surface and even the Xbox show that when its consumer groups are let alone to do their own thing they can turn out some amazing devices.
We, but I can promise you we'll see something to rival the iPhone from Microsoft in the very near future.