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The Redmond, Wash.-based company and its wireless partners may end up spending $1 billion total to make and release the operating system, according to Jonathan Goldberg, a telecom analyst for Deutsche Bank. It is losing ground in an increasingly crowded group of rivals, such as Apple's iPhone, Research in Motion's BlackBerry and Google's Android, which is the most popular smartphone operating system in the U.S.

"This is make-or-break for them. They need to do whatever it takes to stay in the game," Goldberg said. "It's still wide open. They don't have to take share from Android or Apple, so long as they can attract enough consumers switching from feature phones."

Microsoft is no stranger to spending enormously on product launches. The tech giant reportedly spent $500 million with Intel to advertise Windows XP, which launched October 2001. The Xbox was launched with $500 million marketing push and Windows Vista was also released with $500 million spent in advertising and marketing.

However, some analysts estimate Microsoft lost nearly $1 billion dollars on the Kin phones, which was scrapped in June. Regardless, the big spending push on Windows Mobile Phone 7 should help Microsoft jockey for position in the competitive smartphone sector.

Earlier this mont, Microsoft announced plans to link Windows Phone 7 devices to its Xbox console, in a move to capitalize on the success of its console games.