It’s a measure of how deep a hole Microsoft had dug itself into that the employees interviewed by Wired.com were unanimous in calling this a good thing. Even though the software titan had a head start on phone software beginning with Windows CE back in 1996, the subsequent Windows Mobile OS suffered from steep declines in market share when pitted against more user-friendly phones, like the iPhone and the Android-powered Droid.

“It was trying to put too much functionality in front of the user at one time,” said Bill Flora, a design director at Microsoft, reflecting on Windows Mobile’s mistakes. “It resulted in an experience that was a little cluttered and overwhelming for a lot of people today. It felt ‘computery.’”

An un-sexy OS didn’t bode well for Microsoft. The outdated design of Windows Mobile contributed to a stereotype that Microsoft cared little about customers and was focused only on big sales to big companies. It symbolized a software leader losing its edge.

Furthermore, Windows Mobile’s shrinkage in the market was embarrassing for a company whose CEO Steve Ballmer previously laughed at Apple’s iPhone for its lack of a keyboard and high price tag, only to admit three years later that Microsoft had fallen far behind.

“We were ahead of this game and now we find ourselves No. 5 in the market,” Ballmer said at an All Things Digital Conference. “We missed a whole cycle.”

Recognizing it needed to play serious catchup, Microsoft essentially hit CTRL+ALT+DEL on Windows Mobile, rebooting its mobile OS like a balky, old Windows PC and making a fresh start.

The company spent six weeks hatching a a plan for a Windows phone do-over, and it set a deadline of one year to build and ship a brand new OS.

The end result was Windows Phone 7, an operating system with a tiled-based user interface that looks nothing like its predecessor. The first Windows Phone 7 handsets will hit stores today in the United States.

The reset was no simple task: It involved bringing in new managers, reorganizing the Windows phone-design department and opening new test facilities dedicated to mobile hardware.

Here’s how the company did it.

Corporate vice president and director of Windows Phone Program Management, Joe Belfiore, listens to Don Coyner, General Manager of US Shared Studios as he discusses Windows Phone 7. Photo: Mike Kane/Wired.com

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Authors: Brian X. Chen

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