(Wired) -- Microsoft Windows continues to dominate the PC market with a 90 percent market-share stronghold, but when it comes to smartphones, Microsoft is getting beat up worse than a mustachioed villain in a Jackie Chan movie.

Windows Mobile has lost nearly a third of its smartphone market share since 2008, research firm Gartner reports. Windows Mobile had 11 percent of the global smartphone market in the third quarter of 2008, according to Gartner, and last quarter Windows Mobile's market share plummeted to 7.9 percent.

Meanwhile, Apple's global market share grew from 12.9 percent to 17.1 percent, and RIM saw a rise from 16 percent to 20.8 percent, according to Gartner's figures.

It's worth noting Microsoft got a head start with Windows CE, its pocket PC OS, in 1996. Windows CE serves as the foundation for the Windows Mobile OS shipping with some smartphones today. The smartphone OS market, in fact, has existed for several years, and Microsoft was an early leader in the space. But only recently have several additional corporations stepped into this space with their own platforms.

Microsoft's biggest problem? One word: iPhone.

"It was really the iPhone that came out full-bore for a consumer perspective," said Ross Rubin, an NPD Group consumer technology analyst. "We saw app development focus on consumer applications like social networking and games.... Particularly with Apple's retail presence and advantages in that market, through design and so forth, that's where Microsoft's main challenge lies."

Many other technology observers agree that Apple receives credit for sparking the smartphone boom. The 2008 introduction of the App Store enabled third-party developers to sell their own software, further enhancing the capabilities of the iPhone. This proved a workable model, giving 40 million iPhone and iPod Touch owners the ability to choose from the now 100,000 apps in the App Store.

Meanwhile, some developers earned hundreds of thousands of dollars with hot-selling apps. Even if most developers didn't earn that much cash, the success stories helped make Apple's App Store powerfully attractive.

Apple's blockbuster success with the iPhone and its App Store compelled other tech giants to offer their own mobile platforms and app stores as well. Google, Nokia, Research In Motion, Palm and others have opened app stores and begun recruiting developers to compete.

But if Microsoft was the first player in this market, why wasn't the software giant able to replicate the success it had with PCs?

"It was theirs to lose and they lost it," said Raven Zachary, a technology analyst and owner of iPhone app development house Small Society. "They had everything they needed to execute, to do the right kinds of carrier deals to create an app store, create visual voice mail, touchscreens and so on. They've been in this space since the beginning."

To Peter Hoddie, CEO of Kinoma, which develops a mobile media browser for Windows Mobile and other platforms, a major knock against Windows Mobile isn't the OS itself, but rather the weakness of the bundled apps included with it.

"The sad part for Microsoft is that in terms of operating systems, they have a great one, and they had it long before anyone else did," Hoddie said in a phone interview. "Their first problem is the built-in apps are uninspiring, so that sets a very low bar for developers who are coming to the platform."

Hoddie compared Windows Mobile to the iPhone, whose apps he described as "beautiful," which encourages third-party developers to produce apps of similar quality.

He added that Microsoft's second problem is segmentation in the hardware ecosystem. Windows Mobile ships with several different manufacturers' hardware, including HTC, LG and Samsung. The problem? From a developer perspective, that requires coding an app for several phones with different UI styles, buttons and screen sizes. (The same problem, incidentally, has started to plague Android developers.)

That would give the iPhone another advantage: The iPhone operates on a closed system, which can only run on Apple hardware, meaning third-party developers can produce apps and games that work exclusively with the iPhone.

Therefore, despite Apple's questionable and controversial approval policy for iPhone apps, developers can code one app that works with 40 million iPhone and iPod Touch devices, which is less time consuming than developing several versions of one app for a variety of Windows Mobile smartphones. In turn, that spells out to a larger number of apps in the App Store, which enables Apple's hardware to cater to a larger and broader audience.

The inability to recognize the new smartphone audience is another one of Microsoft's flaws, Rubin said. Microsoft's mobile OS history is rooted in personal digital assistants, which were marketed toward enterprise audiences. Today, the smartphone has shifted into the mainstream as a consumer device, and yet Windows Mobile is still largely focused on enterprise features.

And even in the enterprise market, Apple's iPhone is winning. In a recent customer satisfaction survey conducted by JD Power, Apple grabbed the number 1 spot for smartphones in business. How? JD Power found that more than half of business smartphone owners reported downloading third party games for entertainment, and 46 percent report downloading travel software such as maps and weather apps.

That would suggest enterprise users are interested in mixing business with pleasure in their devices and the iPhone's wealth of choices in the App Store covers those needs.

"I would say Microsoft needs to err more on the side of going too far into the consumer segment versus trying to achieve a good balance between enterprise and consumer features at this point," Rubin said.

Despite Microsoft's recent shrinkage in the mobile OS market, it's not over for Windows Mobile. Rubin said he expects Microsoft to redeem itself with its next OS Windows Mobile 7 as it did with Windows 7 after negative reception of Windows Vista.

Microsoft declined to comment on details about Windows Mobile 7, but a spokeswoman said mobility is one of Microsoft's top investment areas, and the company's mobile strategy will not change.

"The company's mobility strategy has not changed; it is and has always been to provide a software platform for the industry," a Microsoft spokeswoman said in a statement. "The company works closely with many mobile operators and device makers around the world because people want different experiences on a variety of phones."

Leaks indicate Microsoft plans to incorporate iPhone-like touch gestures. Windows Mobile 7 is scheduled for a 2010 release.

"Microsoft believes the Windows brand is very strong, and consumers associate the Windows brand with enabling them to do what they need to do in their digital lives, at least on the PC," Rubin said. "In general with this whole Windows phone terminology, Microsoft is trying to do more to leverage what it believes is the good will value of the Windows brand."

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