Microsoft has reason to fear the iPhone, both for its sales potential and its disruption of Microsoft’s traditional business model of proprietary protocols and customer lock-in, according to Blackfriars’ Marketing on Monday.

It all started when Steve Ballmer was interviewed by CNBC right after Macworld about the Apple iPhone. Among Mr. Ballmer’s many defenses was the fact that on January 17th, Microsoft was selling "millions and millions of phones per year, and Apple is selling zero phones a year."

Looking at the actual numbers, Blackfriar’s points out that "...they [Microsoft] sold about 4 million cellphones running Windows Mobile (any version) in 2006. That figure is up from 2 million in 2005....thanks to people buying newer models replacing their existing ones, it’s fairly safe to say that there are only, in total, no more than 7 million Windows Mobile phones in the world."

That was compared to Apple’s stated goal of selling 10 million phones before the end of 2008. However, the real "kicker," according to the analysis is what the iPhone attacks:

1. The cell phone industry at large.
2. Carriers and handset makers.
3. Proprietary codecs.

Apple is threatening, with a new platform, to change the rules of the game. Aric Winton wrote, "Microsoft’s overwhelmingly dominant position in the desktop OS market has let it go ahead with proprietary systems and formats time and time again, keeping users locked in without being too obvious about it. And time and time again, Apple has had to fight them � both for its own survival, as well as the benefit of the user." Apple is turning the tables now, based on its new found strength as a company.

The same holds for Flash, a proprietary video format, not supported on the iPhone.

Apple could exceed expectations as it moves iPhone distribution into Europe and then a more global release. Suddenly, Microsoft’s whole way of business will be threatened by a tide of iPhone sales that swamps Windows Mobile, and Microsoft will have to work hard to meet the threat.