A second BGR source says the timing of the smartphone release is up in the air, but will likely be after this year's holiday shopping season.

If true, the rumors will mean two things: Microsoft is further risking the ire of its hardware partners by competing against them, and it is adopting the same model that has used in making and selling iPads and iPhones by controlling both the hardware and software associated with the devices.

The company already caused a flap with its plans to sell Surface tablets and laptops. Acer and Lenovo responded that Microsoft ought to think twice about competing against established tablet makers and Lenovo said Surface would have a negative effect on the PC market.

Nokia, Samsung and HTC have all agreed to produce Windows Phone 8 devices in the coming months.

While licensing its software to partners who sell it on their own hardware has been Microsoft's PC model for years, things are different with tablets and phones. Whereas Microsoft dominates PCs, that is not the case with tablets and , where Apple throws its weight around with iPhones and iPads.