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Microsoft Corp. (MSFT) is going to need a lot more than a new coat of paint if it wants to stay relevant in the smartphone business.

That, essentially, is what Microsoft has applied with the release of a software update to its Windows Mobile platform and its effort to rebrand those handsets as "Windows phones."

The latest upgrades won't be enough to keep Microsoft from getting pummeled in the increasingly tight smartphone market, based on recent market share data. Where consumers now expect increasingly sophisticated software and are looking for an overhaul of the mobile software, the company could only manage minor tweaks and changes.

"Windows Mobile devices, despite some really good hardware and some good brands behind them, just don't move," said Matt Thornton, an analyst at Avian Securities.

The lack of demand, along with freely offered software from heavy hitters Google Inc. (GOOG) and Nokia Corp. (NOK), puts into question the appeal and business sense of Microsoft's software, which is already seeing waning support from the handset makers.

A year ago, Windows Mobile was riding high as it pushed to expand itself from a business-class device to an all-purpose phone. Apple Inc. (AAPL) iPhone and Research in Motion Ltd.'s (RIMM) Blackberry line, however, beat it to the punch.

But Google's Android has proven to be the key threat to Windows Mobile. The slicker operating system is freely given away to handset makers, compared with the licensing fee that Microsoft charges for Windows Mobile. Android's popularity, and Nokia's decision to make its Symbian operating system available for free may change how Microsoft operates.

"I wouldn't be surprised if that pricing model feels pressured," Thornton said.

Key partners such as HTC Corp. (2398.TW) have diverted resources to Android. Motorola Inc. (MOT) has completely scrapped developing Windows Mobile phones this year. It's clear why: HTC's Android phones are getting high-profile launches by carriers around the world, and there's a lot of curiosity over Motorola's Android line-up.

Microsoft is taking steps to address the issue. Windows Mobile 6.5, slated to launch on Oct. 6, boasts a new user experience, better browsing, and a My Phone service. Many of these services, however, imitate what's around out in the market.

Many Microsoft enthusiasts and smartphone users are instead awaiting the release of Windows Mobile 7, which is expected to be a complete reworking of the operating system. The company hasn't said when it will hit the market, but industry observers peg the launch to the second half of next year.

Given the advances that Microsoft's rivals are making, that may be too late.

Microsoft recently shares fell 2.7% to $23.99.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com