FORTUNE -- It was a fateful day back on Feb. 16, 2009. That's when LG Electronics' then-vice chairman and CEO Nam Yong met with Microsoft CEO Steve Ballmer in Barcelona, Spain. There, at the world's largest mobile industry trade show called the Mobile World Congress, LG Electronics and Microsoft inked an agreement for strategic collaboration. LG wanted to use Microsoft Windows Mobile OS as its platform for some 50 types of smartphones by 2012. The decision by the world's third-largest handset manufacturer to select Microsoft as the operating system for its smartphones was one of the most puzzling announcements to come out of the confab.
Yet Nam confidently told reporters that LG's smartphones using the Windows Mobile OS would be key to setting trends in the rapidly growing smartphone market. Ballmer concurred: "Microsoft's software technology and LG Electronics' hardware technology will provide users with an amazing mobile experience."
Microsoft had every reason to be happy. The market was shifting away from PCs toward mobile phones. Microsoft, which had been complacent thus far, was struggling in the mobile market, having already lost the upper hand to Apple and Google. So it was a surprise that LG, which had just edged out Motorola for third place in the global handset market, was joining forces with Microsoft. (LG had posted an 8.6% share of the global handset market in 2008.)
Many questions about LG's strategic choice needed answering. After all, Windows Mobile was a hastily cooked-up OS designed to keep up with Apple and Google. Microsoft had basically scaled down its PC-based Windows OS and squeezed it into a handset, making the OS painfully slow. Moreover, the problems with Windows Mobile were not restricted to speed. While in Barcelona, Ballmer was busy criticizing Apple's App Store -- not on product merit, but on the basis of Apple's closed system. Ballmer said it was important that the App Store be open, because he viewed openness as a basic requirement.
But with Windows Mobile, it would be impossible to match the App Store's application ecosystem in the short term. Apple, having just created a sensation with its iPhone, had not even bothered to show up at Barcelona. And yet, the rising star, LG Electronics, chose the setting sun, Microsoft.
Thus, right from the outset, LG started off on the wrong foot in the smartphone business. While pledging to make a slew of smartphones into 2012, it had no solution for the Windows OS's lack of applications.
The company also made another strategic mistake. LG Electronics Mobile Communications Company CEO and President Skott Ahn, who was also in Barcelona, said the key trend in handsets for 2009 would be the User Interface (UI). The UI is focused more on how one uses a handset, rather than on what to use, due to its focus on making usability easier. LG's Arena Phone, for example, uses touch screens to show function buttons in 3D. The touch screen was becoming the trendsetter among handset UIs, and now LG had gone one step further. LG's 2009 business strategy focused on making a more consumer-friendly interface. Stating that it would push for a convenient UI as its key strategy meant aggressive marketing efforts. LG even set in motion a plan to increase its product-planning staff.
In another part of the handset market, Motorola had already decided to collaborate with Google to launch its Android phone. After Motorola's eclipse by LG in global market share, it spared no effort in developing an Android phone with Google in a bid to make a comeback. In Korea, the Pantech Group was also putting everything on the line to develop a new smartphone using Google's OS.
These competitors were just waiting for the chance to deal a blow to LG. They believed that the market's shift to smartphones offered them a golden opportunity. Pantech wanted to ride Google's winning streak, which had begun with its win against Microsoft in the OS market, and do the same in handsets. Meanwhile, LG stressed on the one hand a more user-friendly interface and more aggressive marketing and, on the other hand, Microsoft Windows Mobile, which was already proven to be a failure in the market with no applications store. And that's not to mention that LG was planning to wait three years to launch smartphones, as late as 2012.
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