WP7 faces opportunities, challenges in Year 2

Windows Phone 7 (s msft) is increasingly catching the eye of smartphone buyers but awareness is still a major hurdle in its bid to challenge iOS (s aapl) and Android (s goog). That’s the word from the NPD Group, which found that while Android is the top choice of smartphone owners, 44 percent of current and upcoming smartphone owners are considering purchasing a Windows Phone 7 device in the future.

That’s good news for Microsoft, which is poised to release a new Mango software update that should significantly improve the Windows Phone 7 platform and make it more competitive with Android and iOS. But WP7 is also facing an awareness challenge as it doesn’t seem to be on the radar for many consumers.

The NPD Group said 45 percent of consumers are still not aware of Windows Phone 7. The top reasons for lack of interest in WP7 is that people don’t know enough about the platform (46 percent) and ecosystem lock-in for consumers who have invested a lot in rival operating systems.

Android, according to NPD, boasts more interest from consumers than any other platform (63 percent) and is also the platform consumers were “most interested in” (36 percent). Android is sucking away attention from BlackBerry (s rimm) with one-third of BlackBerry owners saying they are most interested in Android for their next smartphone purchase.

The takeaway for Microsoft is that it has a ripe opportunity but it also has a big set of challenges. As I’ve argued in the past, a platform that can provide a polished experience like the iPhone has a good chance to succeed. Android has been the best alternative to date, but WP7 is now rounding into form and could draw away interest. But it has to raise its profile and get the marketing message out more. Where’s the next version of the “Really?!” ads?

Sales of WP7 devices have been less than what Microsoft has been hoping for CEO Steve Ballmer recently admitted and now pressure is mounting on Mango to kickstart sales. A lot will rest on carriers pushing WP7 as a third platform but with Microsoft’s purchase of Skype, the company will need to assure operators that it’s not trying to undermine their business with cheap or free voice calls.

Microsoft has to also fight through the app lock-in dilemma. Many iOS and Android users have sunk in a lot of money and time into apps and it’s not easy just starting over on Windows Phone 7. Give Microsoft credit for building up a solid library of apps but it still needs to also hammer home more of the app message, educating consumers that there are great apps on WP7 and that it’s worth the investment in a new platform.

As we approach the one-year anniversary of the WP7 launch, now is the time for Microsoft to get moving. It hasn’t been a great year sales wise but Microsoft’s done a lot of good work on the platform and app ecosystem to position it for a push in year two. And it’s got Nokia(s nok) preparing to churn out phones in the next year. It wasn’t until a year in that Android really started to take off. With interest growing in WP7, Microsoft has to hope that it can see a similar growth spurt. It’s going to be a lot tougher with Android entrenched at the top and iOS still a consumer favorite, but Microsoft can see the opportunity laid out in front of it. Now, it just has to seize it.