[By Duncan McLeod] Microsoft risks ceding the smartphone market. Its apparent decision to delay the release of Windows Mobile 7 could be the final nail in the coffin of its mobile ambitions. Given that computing is going mobile, that’s a big problem for the software maker.

At last year’s Mobile World Congress, the annual cellphone industry conference in Spain, I heard several journalists snickering not so quietly while Microsoft CEO Steve Ballmer unveiled details of the then new Windows Mobile (WinMo) 6.5.

What they found amusing was that Ballmer was touting a new mobile phone operating system that already looked completely out of date. But Ballmer pressed on, bringing executives from cellphone companies like Taiwan’s HTC onto the stage to wax lyrical about the software.

WinMo 6.5 was never meant to be. The software’s next big upgrade, WinMo 7, was supposed to ship last year. However, when it was delayed until 2010, Microsoft announced 6.5 as a placeholder.

Now, in a move that could deal a death blow to Microsoft’s ambitions in the smartphone market, the company has reportedly delayed the release of the WinMo 7 until 2011.

WinMo 7 was expected to drag Microsoft out of the cellphone dark ages with a product that could finally compete with Apple’s iPhone and Google’s fast-growing Android. In the few short years that Google has been developing the Linux-based Android it has gained significant traction. Today, the software is available on a range of smartphones from manufacturers such as HTC, Motorola and Samsung.

Analysts say WinMo 7 is Microsoft’s last chance to save its mobile operating system business. The latest delay in the software’s release looks set to play directly into Google’s hands. Handset manufacturers are already indicating they’re likely to ditch WinMo in favour of Android. Reports suggest that this year some of them are preparing to sell handsets running Android that were originally meant to run WinMo 7.

It’s far from clear why Microsoft has been unable to develop a contemporary and compelling mobile operating system. Its new Windows 7 desktop software is top notch. Yet in mobiles the company seems lost.

For a company that has effectively controlled the market in computer operating systems for the past 25 years, the prospect of ceding the market to Google is a nightmare.

In developed markets, people routinely use desktop computers to access the Internet. But in developing countries, where PC penetration is low, billions of people will connect to the Internet for the first time using their mobile phones. By the end of this decade, almost everyone on the planet will be online — and most will be connecting via mobile devices of some form or description.

If Android is the software of choice for these devices, Google will have triumphed over its old adversary.

Even if Microsoft gets WinMo 7 right, it is probably going to have to rethink the way it does business: it may be forced to emulate Google and give away its operating system to handset manufacturers. For a company that makes its money selling software, that might seem heretical.

Google gives Android away hoping to monetise its online services, such as search and e-mail, through advertising.

The problem with this model for Microsoft is that its online applications are poorly developed compared with Google’s. Its Windows Live Mail service, for instance, is a poor quality product compared to Google’s Gmail.

When Ballmer takes to the stage again in Spain next month, he’ll have to pull a rabbit out of his hat if he’s to stop another round of guffawing from impolite tech journalists.