Microsoft exec Ray Ozzie, at a lunchtime session with bloggers at its PDC conference told the bloggers that apps won’t be a differentiating factor on smart phones.

He is wrong. Totally wrong.

Why is Mike Arrington so passionate about his Droid (we argued about it for 39 minutes on the Gillmor Gang last week and then we went to the beach together on Sunday and argued about it some more in private).

I’ve talked about this before. Most of what we argue about is apps.

Droid is better than iPhone because Droid has Google Voice, Arrington says.

iPhone is better than Droid, I say, because I have Tweetie, which kicks ass over Twidroid and the other Twitter apps.

Facebook is better on the iPhone. Noticeably better. Even Chris Brogan (who also is a Droid proponent) said that on his Twitter account.

Anyway, everything about these phones will be about the apps that run on top. Can you imagine a Microsoft exec arguing that Windows isn’t better because of apps? Give me a break. Ray, sorry, but you are off the rails.

If Ray thinks that the best apps will come to Windows Mobile and that the best developers will spend time developing for that platform well, then, Ray is drinking better Merlot than I am.

I’ve seen how even kids compare their phones on the playground. They compare apps and games. The functionality of the phone doesn’t really matter anymore. It’s what’s built on top that gets the kids excited.

Same in business. Last week a VP at Citrix came up to me showing off his iPhone app (it let him get into a Windows box somewhere else in the world and use Microsoft Office).

Even today at the PDC, what did Vivek Kundra (America’s CTO) show his app off on? Yeah, an iPhone. And this was at Microsoft’s own conference!

Ray, the truth is I was there in 2006 talking with the Windows Mobile team when they told me they were going to only build devices for the enterprise. Back then they thought the growth would come from going after RIM. Even Wired Magazine can now see the fumble the team made. They were wrong and now you are wrong. Apps are what will decide winners in this play. For now that’s Android and iPhone. Big time.

But if I were losing developers the way Microsoft is I’d probably say they don’t matter either. It just shows that Microsoft has no secret strategy up its sleeves and has no way anymore to get developers excited about its mobile platforms. Google is now in the best position and Ray knows it.

UPDATE: several commenters here (see comments on this post) say that Ray’s comments were misunderstood. I’ve talked with Steve Gillmor who recorded this lunch session (he’ll get the video up shortly) and it sounds like his comments might be more nuanced than VentureBeat presented them. Cool, let’s get into the comments.