The word is that Microsoft is now building a phone with Google's mobile operating system. No joke. According to The Wall Street Journal, Nokia – the phone maker Microsoft recently acquired for $7.17 billion – is working on a low-cost Android phone, expected to be ready by the end of this month.

At first blush, that sounds like poppycock. But it actually makes perfect sense – and it shows just how much things have changed in recent years for Microsoft, the onetime king of the tech world that is now playing catchup in newer markets like mobile and cloud computing. In the past, the company could force its own software into practically any market. But nowadays, in a world where open source software is so pervasive, particularly in the all-important world of mobile phones and tablets, Microsoft is better off embracing this free code – at least in some cases.

Microsoft's Android phone, it seems, is a way of competing in places like China, places where so many hardware makers are grabbing the open source Android code and slapping it on a phone. Android is quickly becoming the de facto standard, and Microsoft is trying to find a way of fitting in. Windows Phone is still struggling to find a place in the US and Europe, and it stands even less of a chance in China. Android is a very good way forward.

The Change in China ——————-

A decade ago, Microsoft's position was completely different, as is so plainly evident from the way the company captured China in the age of Windows.

In 2001, Microsoft was charging $200 for a copy of Windows here in the U.S., but it was clear that people in China weren't going to pay that much. In fact, most of them weren't going to pay anything. Piracy was rampant, and as David Kirkpatrick reported in a 2007 Fortune article, Bill Gates knew that Microsoft could win the day simply by letting people pirate Windows.

He knew they would pirate Windows before anything else – including the open source Linux operating system, which was still getting off the ground. "It's easier for our software to compete with Linux when there's piracy than when there's not," Gates told Kirkpatrick. And once the Chinese market got used to Windows, the company could start clamping down on piracy, using its political and legal power to start charging for the OS. And that's pretty much what happened.

But nowadays, Microsoft doesn't have the leverage for such an audacious play. The market has already moved to cheap knockoff smartphones based on Android, which is not only freely available to anyone but, unlike the Linux of 2001, completely ready to control a market. No one wanted to pirate Microsoft's Windows Phone OS. No one needed to. Android was already better, cheaper, and easier to deal with. So Microsoft is building a phone based on Android.

An Open-Source Windows Phone? —————————–

As The Journal says, this as a sign of how badly Microsoft and Nokia missed the low-end of the smartphone market. But you can also see this as a sign of how easily open-source software flows wherever there's a need. A few years ago, the big-name smartphone makers didn't care about the low-margin business, but after Google open sourced it, Android soon moved onto cheap-ass phones, quietly seeding the space. In other words, it was doing the work that pirated versions of Windows did in the Chinese PC market a decade ago.

Building an Android phone is the best thing Microsoft can do in this market. Well, the best save one. We've argued for months now that Microsoft should just open source its Windows Phone software. Windows Phone can't compete with Android if it's closed source – pirating closed code is messier than grabbing open code – but there's plenty of space for open source alternatives to Android, not only in China, but here in the U.S. In the U.S., the problem is that Windows Phone costs money, whereas Android is free.

The question is whether Microsoft has yet reached the point where it can pull something like this off. A few years ago, we would have laughed the suggestion off, but Microsoft has finally clued into the fact that it's going to take bold and ambitious changes for it to regain lost relevance. And from what we hear, incoming CEO Satya Nadella may have the brains and the grasp of technology to make these changes. In the next few years, we'll learn if he has the guts. At the very least, he and the company are willing to build a cheap Android phone for the Chinese. And that's a start.