As Windows Mobile continues to struggle to compete, Microsoft (NASDAQ:MSFT) has signed up software and automated testing provider Bsquare (NASDAQ:BSQR) as its first worldwide distribution partner for the operating system. The relationship marks a departure for Microsoft, which has always controlled the licensing of WinMo. While Microsoft’ OS has lacked the buzz that newer flashier OSs like Android have captured, its relationship with Bsquare will at least help it achieve a greater reach.

Bsquare will distribute Windows Mobile 6.5 and eventually 7 software globally to more than 30 original equipment manufacturers and device-makers, as well as provide licensing, technical support and go-to-market activities as their current direct agreements with Microsoft end. The company will focus primarily on rugged device manufacturers and new enterprise verticals. Bsquare is already one of the largest resellers of Microsoft software­–embedded portable products and has supplied to handset-makers such as Samsung, LG and HTC, as well as supplied barcode scanners, data collectors and medical products to other verticals. By partnering with Bsquare, Microsoft is free to focus on helping the large handset manufacturers embed the OS, while Bsquare will focus primarily on the vertical space, said Larry Stapleton, vice president of global sales for Bsquare.

“They’ve selected Bsquare to enable a larger number of vertical space guys — barcode scanners, data collectors, B2B enterprise products — which can really take advantage of the strengths of Windows Mobile, which is connectivity to the back end and all the IT stuff that makes data flow so seamlessly,” Stapleton said. “We think we can take their existing customer base and multiply it several times in the next few years and come out with a whole slew of new innovative products Microsoft just hasn’t focused on in the last few years.”

While its competitors like Apple cross app store milestones, WinMo has only attracted about 550 apps, with 20,000 others available through side-loading or third parties. Stapleton said that by shifting the enterprise side of its business to Bsquare, Microsoft can focus more energy on perfecting its OS and app store model. Bsquare’s customers are more interested in apps for data collection and functions specific to their businesses. As such, Microsoft’s businesses are bifurcated between Windows 6.5 and 7, he said.

“We work with some of the Tier 1 telcos that are familiar names, with chip manufacturers to come up with the circuit boards that go into things like netbooks and smartphones, and then we work with the actual manufacturer that takes the boards, puts plastics around them and customizes applications for the telco,” Stapleton said, adding that Bsquare also works with Linux and Android and recently joined the Symbian Foundation. “We work all up and down the software stack in Windows Mobile.”

MICROSOFT TARGETS TELCOS WITH NETBOOKS

Netbooks, which are expected to number nearly 35 million by the end of 2009, according to ABI Research, are another important part of Microsoft’s strategy with Windows. At the same time Microsoft unveiled Windows 7 in October, more than 50 wireless operators around the world announced plans to offer netbooks based on the new OS. In the U.S., Verizon Wireless was the first to commit, but Microsoft has promised to get the four Tier 1 carriers and several regional telcos signed up as well.

This is the first client OS Microsoft has made specifically for netbooks, with a smaller OS footprint than its predecessor. It is being targeted at consumers in emerging markets using it as their primary computing device, as well as consumers in developed markets that see it as a secondary device for access to rich media, said John Zanni, general manager of software and services for Microsoft Communications Sector. Microsoft will also look towards the enterprise, but consumers are the primary target today.

“We wanted to make sure [telcos] were offering a device where the customer had a great experience,” Zanni said. “Windows 7 is really an operating system and functionality that most customers are familiar with. It is easy for them to use it. It’s not a different way of working or playing. It’s what they want.”

Zanni said consumers are increasingly looking to buy their mobile devices, PCs and laptops from their telcos, and telcos are looking to tap into this opportunity. He said that consumers look to their telcos for convenience and cost savings and appreciate that netbooks can be bundled with their data plans. Zanni said 40% of consumers see the services and support offered by the telco as the primary selling point.

The next step will be adding services on top of the Windows 7 platform, Zanni said. This could include Internet Explorer, the Microsoft Windows suite, Windows Live or a host of other Microsoft products. The company will also work to more tightly integrate the devices and these incremental services with the telco’s network, he added.

“For the telcos, it means they are going to use Windows 7 to make 3G become as ubiquitous as Windows XP did for Wi-Fi,” Zanni said. “It is great that we can use our software that is familiar and easy, that customers are used to, and work with telcos to take something pretty new to the market.”