Dial W For War.

Recent headlines seem to indicate that Europe poses a threat to Microsoft's ravenous appetites. Pushing a fight abandoned in the United States, European Union trustbusters are reviewing Microsoft's move into the market for digital media, and are due to rule early next year. Meanwhile Linux, the free Finnish operating system, has been gaining customers at the expense of Microsoft's profit center, Windows. The most recent large customer to begin testing the free software: the British government.

None of this is good news in Redmond, Washington. But less noticed is the fact that the battle may be turning in Microsoft's favor on perhaps the most important technology front of all--the war for the future of the mobile phone. Dominated by Finnish giant Nokia, the mobile market is the one technology sector in which Europe has enjoyed a sizable lead over American and Asian competition. In recent weeks, however, Microsoft deals with the No. 2 and 3 mobile-phone makers, Motorola and Samsung, and a new partnership with the world's largest mobile operator, Vodafone, have some experts betting that Bill Gates will be able to dominate the mobile-phone arena as completely as he has the computer world.

The battle centers on smart phones, the wireless handsets that will soon (or so we're told) allow us to e-mail, play games or do business on the go. Smart phones will represent a $16 billion market by 2007, up from $3 billion today, predicts IDC, a technology-research firm. The key to unlocking the profit in this field is not in making the phones but in making the software inside. While the price of smart phones is expected to fall over time, the software that turns phones into multipurpose tools and toys is expected to be a gold mine. That's what happened when Microsoft came out with Windows: it turned the PC into an increasingly cheap shell for expensive software. "The danger is that Nokia may continue to be the world's leading handset maker, but Microsoft will end up taking most of the mobile industry's available profits," says Keith Woolcock, a director at London-based Westhall Capital.

The Windows operating system is in only about 10 percent of smart phones being shipped today, so Microsoft is playing catch-up. In 1998 Nokia teamed up with other phone manufacturers to create their own operating system, called Symbian. The Symbian operating system now runs in 70 percent of smart phones. And Microsoft's forays into mobile devices haven't been seamless, with some early PDA and smart-phone deals flopping or unraveling.

But now Microsoft is making headway in a two-pronged attack on the Nokia- Symbian position. The first prong is designed to win over big phone companies, which play a key role in selling smart phones (you've heard the pitch: buy our service for a year, get a phone cheap). Last month Vodafone agreed to work with Microsoft on developing standards for mobile-phone software. That doesn't mean Vodafone will choose Microsoft over Symbian in the end, but it does make the world's largest mobile-phone company (123 million customers) a more neutral party in the war.

Microsoft courted Vodafone by offering goodies Nokia has not. The Finnish giant's latest gadget, N-Gage, plays games that must be bought in stores ...