This is unconfirmed news but if this rumor is to be believed then we can expect a Zune Phone much sooner than expected i.e. in the last quarter of 2007. If Zune Phone is released then Microsoft will find themselves in a position very similar to Nokia who makes Symbian S60 platform, licensing it to other manufacturers and at the same time makes phones powered with the same platform. The manufacturers of Windows Mobile phones will be in direct competition with Microsoft - a company that licenses them Windows Mobile OS. Some Microsoft managers had publicly admitted in past that Zune Phone is coming sooner or later.
If Zune Phone becomes a reality then it will go head to head with Apple iPhone which is scheduled for June 2007 launch.

Taimur Asad (The Microsoft "Wow" Blog!)