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Microsoft beat Wall Street expectations with its fiscal first quarter results, despite an 18% year-on-year drop in profits, but dark clouds still hung over its mobile activities. The highlights were pre-orders for the new Windows 7 and business sales, while the cash cows Windows and Office were under pressure, and much of the improved earnings figure came from cost cutting programs - which pleased analysts. On the mobile front, the best the software giant could do was turn in flat revenues, while online services - which will increasingly important in staying in the mobile game alongside Google and Apple - continued to lose money.

The Entertainment and Devices division - which houses Windows Mobile as well as Xbox/ games, Zune and hardware accessories - saw flat revenue. This was bad for mobile - Xbox 360 and its games enjoyed increased sales, which meant the rest of the products were down. The Microsoft statement said: "Non-gaming revenue decreased $98m or 14%", though it insisted that the worst performers were not Windows Mobile - whose share of the smartphone market fell from 12% to under 10% in the second calendar quarter - but PC hardware products like mice, Zune and embedded device platforms.

One solution to the flagging sales of Zune will be to include its software with a wider range of devices and bring it to phones - a tactic Microsoft has considered for years, with repeated 'leaks' of a possible Zune phone, but which CEO Steve Ballmer has now confirmed. Not that the Zune phone itself is on the horizon - instead, Microsoft will integrate the multimedia player's functionality into Windows Mobile 7, due for release next year.

He said in an interview with CIO recently: "If we don't have the software and services that are useful, helpful and valuable for the consumption of music and video, we are sort of not really a player. Now, we built the Zune hardware with the Zune software - and what you'll see more and more over time is that the Zune software will also be ported to and be more important not just with the hardware but on the PC, on Windows Mobile devices etc."

Ballmer would not comment on the fate of the mobile version of Windows Media Player in the light of this Zune strategy. And another mobile product was being kept under wraps, with a promised unveiling of the cellphone version of the Bing search engine failing to materialize. Product planning director Stefan Weitz had been expected to show off the product at last week's Web 2.0 Summit but in fact he scarcely mentioned mobility (perhaps thinking it was a dirty topic for Microsoft after the fiasco of the mislaid Sidekick data and the lukewarm response to WinMo 6.5).

Bing, which Microsoft calls a 'decision engine' replaced the unpopular Microsoft Live Search engine in June and has seized third place in the market after Google (with 60%) and Yahoo. However, while Google, in its own results announcement last week, pointed to smartphones as the key growth driver for its own engine, Microsoft runs the risk of coming late to the game again. As if to run salt in the wound, Google last week unveiled its latest enhancement, Custom Search for Mobile. This allows website owners to add customized search boxes and now supports formatting of results, optimized for specific phones (Android, iPhone and Pre, initially).

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