A data failure at Microsoft Corp.'s (MSFT) Danger mobile subsidiary shows that the software giant still faces major challenges with its mobile strategy.

The outage - which saw hundreds of thousands of customers lose data - likely won't fatally damage Microsoft's mobile plans, but the incident has thrown an unwanted spotlight on the company's attempts to shore up lost market share to rival mobile operating system makers, and re-ignited questions as to what Microsoft wants to achieve with mobile.

"Microsoft is behind the curve," said Avi Greengart, analyst with Current Analysis. Greengart said the company is competing with a growing list of competitors, including Apple Inc.'s (AAPL) iPhone; Research in Motion Ltd.'s (RIMM) Blackberry; Google Inc.'s (GOOG) Android and Palm Inc.'s (PALM) Web OS.

Last week, about 800,000 owners of the Sidekick - a Danger device operated by T-Mobile, a unit of Deutsche Telekom AG (DT) - lost data stored on their machines due to a back-up failure. Microsoft said Thursday it had recovered most of the data and would start restoring it to customers.

Microsoft acquired Danger in 2008 for a reported $500 million, although it hasn't disclosed the cost. Danger provides valuable research and development that feeds into and enhances the company's mobile strategy, said Aaron Woodman, an executive working on the company's mobile business.

Microsoft's challenge is balancing two goals with its mobile business: ensuring its Windows operating franchise - which in fiscal 2009 generated about a quarter of the company's revenues - can be as ubiquitous in mobile as it is on the desktop; and designing an experience that can compete with the feature-rich devices from its peers. The Windows Mobile operating system, primarily targeted at business users, is seen as lagging as a consumer device.

"The Internet and computing are converging," said Roger Entner, analyst for Nielsen Co. "If they don't play in mobile, there won't be a Microsoft in 20 years."

The popularity of smartphones like iPhone and Blackberry has put Microsoft on the back foot. Two years ago, Entner said, the company enjoyed almost 50% market share of the U.S. mobile operating system market. Now, it's about 27% according to Nielsen's research. With over 30 million phones running the operating system, technology research firm IDC says Microsoft's global market share is 11%.

Microsoft licenses Windows to handset makers like Samsung Electronics Co. (005930.SE) and HTC Corp. (2498.TW). The model gives Microsoft access to a broad customer base, especially in business where tech managers want a choice of carriers and providers; however, critics argue the strategy hurts the company's ability to innovate, such as with touch-screen capability. In contrast, Apple and RIM can optimize their operating systems to work with their phone hardware.

Microsoft also hasn't built the same momentum in third-party mobile applications that rivals like Apple enjoy.

"Windows Mobile was built as a productivity-oriented operating system, but the business and consumer user experiences are merging," Greengart said, "because employees are consumers too."

Microsoft has improved the user experience with its recently launched Windows Mobile 6.5, and reports suggest that the next operating system launch, Windows 7, could incorporate features from its Zune digital media player.

Microsoft admits some missteps with mobile. "The market has shifted faster than even Microsoft expected it would," Woodman said in an interview.

"It's hard to find phones which have the distribution of ours. But the complexity of the model has hurt our ability to control the experience. We have to evolve that model over the next few years." While Microsoft doesn't believe it needs to build its own phone hardware, Woodman said, the company is "open to a variety of models."

If it can make Windows 7 as attractive to consumers as it is to the IT managers who buy mobile phones for their employees, it could regain lost ground, said IDC, which forecasts that if Microsoft can absorb these lessons in time for the next upgrade, it can win three percentage points of share in the global mobile operating system market by 2013. But, as Greengart said, the pressure is on: "If it doesn't happen in Windows Mobile 7, they are in real trouble."

-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com