It doesn't look like Microsoft will come out with a smartphone next week at the Mobile World Congress in Barcelona as rumored. Rather than the usual "no comment" Microsoft has issued a full denial. The Microsoft smartphone was just speculation based on a research report anyway, but it's still hard not to ask: what would have been the point? This is not say that the industry should just bow down to RIM and Apple; competition is crucial, and the market is predicted to get more crowded this year. Acer and Dell are both expected to release smartphones at the Mobile World Congress show.But Microsoft has too much to lose if they manufacture a smartphone and it tanks. The most obvious problem is that it couldn't compete with industry giants BlackBerry and iPhone. Microsoft also doesn't have significant relationships with mobile carriers and it could tick off phone makers such as Motorola and Samsung that run Windows Mobile.Microsoft has said it will continue to work with Nvidia, which provides high-end graphics chips, but I think this is indicative of Microsoft's plans to enhance Windows Mobile, possibly with Zune video features. Microsoft bloggers Mary Jo Foley and Joe Wilcox both believe that the supposed Microsoft phone is actually just a reference design, which is a product mockup that Microsoft designs as a suggestion for its hardware partners.If Microsoft had been more successful with its Zune portable MP3 player, a smartphone would seem like the next step, perhaps even a Zune phone that would compete (or try to) with the iPhone. But the Zune, despite being a quality product, has failed to catch on in an iPod dominated world. If Zune couldn't cut it, how much of a chance does a Microsoft smartphone have in a much more crowded and competitive market?Microsoft observer Michael Gartenberg explored this subject on his blog, listing a variety of reasons why there will be no Microsoft phone. Gartenberg makes the good point that no company has been successful licensing technology platforms to others and then competing with a device of their own. He sees Microsoft beefing up the features and functionality of Windows Mobile instead."There's always some possibility of Microsoft exploring a phone but it\u2019s far more likely mobile Zune branded functions just get baked into a future version of Windows Mobile and other platforms, something we\u2019ve heard Steve Ballmer hint about in the last few months."In the wake of Microsoft's poor revenue earnings and layoffs last month, mobile is one area that many bloggers and analysts believe the company needs to strengthen in 2009. But I don't think an actual mobile phone is what we had in mind. Integrating Zune features and the phone-app store SkyMarket into Windows Mobile 7 seems like a more realistic way for Microsoft to make waves in the smartphone market.