Can Windows Phone 7 Update and Advertise Its Way Out of Rut?

Microsoft’s mission to compete in the cutthroat smartphone space took a blow today with the release of market share figures for the last quarter of 2010.

The setbacks for Microsoft came on two fronts: First, Android is running away with it in the U.S. consumer race, increasing its market share by 9 percent from the previous quarter to a market-leading 53 percent, according to market researcher The NPD Group. Second, Windows Phone 7 still has lower market share than its rusty old predecessor, Windows Mobile, which isn’t even available from carriers anymore.

Windows Phone 7, which launched halfway through Q4 2010, ended the year with 2 percent market share, compared with 4 percent for Windows Mobile, according to NPD.

Sure, it’s only one quarter in an extremely competitive market. Rome, after all, was not built in a day (or a quarter). But Microsoft did choose to design Windows Phone 7 for the broad consumer audience, and now must watch Android skyrocket in growth while the Verizon iPhone 4 is set to debut in stores in 10 days. It must be a vulnerable feeling when your new mobile platform can’t even beat the market share of your old, mostly unavailable platform.

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Despite an extensive ad campaign for Windows Phone 7, efforts to connect with consumers have not worked out so far. Microsoft stated it has shipped 2 million Windows Phone 7 phones to carriers, but it has been mum about direct sales to users.

More bad news for Windows Phone 7 — and more good news for Android — arrived in a separate smartphone market share report today on worldwide use.

Market research firm Canalys tracked 101.2 million smartphone shipments during the fourth quarter of 2010 and has the Android platform in the lead for the first time in worldwide use. For the quarter, 32.9 million Android devices were shipped worldwide, overtaking long-time leader Nokia Symbian, which shipped 31 million devices, according to Canalys.

All smartphone platforms tracked by Canalys saw growth between 2009 and 2010, except Windows Mobile, which unfortunately for Microsoft saw a 20.3 percent decline. Yeesh.

But all is no lost for Microsoft and Windows Phone 7. WP7 debuted too late in the quarter to benefit from the 2010 holiday season, so the low Q4 numbers may not indicate WP7’s true worth. Also, Microsoft has the revenue-generating power to fund the rampant advertising of Windows Phones, and has plans for a Windows Phone OS update sometime “in the next few months” to quote Steve Ballmer’s CES keynote speech.

The pending Windows Phone update will include copy-and-paste functionality and a renovation of the Marketplace app store’s search feature, among other things.

But with the way the mobile market is slipping away from Microsoft, the company’s mobile life depends on a robust update to keep what little momentum WP7 has from dimming. And more funny TV commercials won’t hurt either.

In a statement, Canalys analyst Tim Shepherd said that “[Smartphone] vendors cannot afford to be complacent in 2011.” Microsoft has nothing to be complacent about in mobile, but to stay in the game at all Redmond will have to keep adding new interface features, innovate with hardware partners, and increase the amount of mobile apps.

Shane O’Neill covers Microsoft, Windows, Operating Systems, Productivity Apps and Online Services for CIO.com. Follow Shane on Twitter @smoneill. Follow everything from CIO.com on Twitter @CIOonline. Email Shane at soneill@cxo.com.