Not to be outdone, Microsoft (MSFT) is apparently working on a Zune phone, according to Crunchgear. That is not great news for Apple (AAPL). The iPhone is not to be released until mid-year and will work on the Cingular network.

The Zune phone will work as a phone and a multimedia streaming device. It could be out before the end of the year.

Oddly enough, the father of the Zune left Microsoft today. Perhaps Zune sales have been poor. Or, perhaps Microsoft management thought he was too slow to react to rumors of an iPhone.

If Microsoft is willing to pay up for a fast launch and a deal with a company like Verizon (VZ), it could be a nice fight.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.