I find it strange that there is so much space below the arrow mark at the top right of the windows mobile home screen. An entire column is kept blank. Is it a good design practice? What's the purpose of it?
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Personally I like the icon. The empty column does have a function: You can start your swipe to the left there, without risking accidentally pressing any tiles. As oppossed to iOS, where unintentionally starting apps keeps happening to me. I attempted to illustrate this:
It is worth noting that in Windows Phone 8 this design element is removed, in favor of using the entire screen for tiles.
First, some background: one of the fundamental principles underlying the UX of the Windows Phone is that the application screen isn't necessarily the same size as the phone screen.
The phone screen, at least for the 7.x series, is 480x800 pixels. Application screens can be as wide or as tall as required (but not usually both). The users experience is of "panning" across the application screen, which may have a large number of different columns. As a part of the UX design for this, it's usual for the edge of the next column to be visible at the righthand edge of the column you're viewing.
For the start screen itself, the righthand arrow is an affordance that there is more to see to the right. IIRC, they did try showing the very edge of the alphabetical list, but found it too cluttered, so they left the space blank.
It's also worth recognising (as @LG102 has noted) that they've revisited this decision for Windows Phone 8 and have decided to do away with the arrow and it's affordance, in favour of larger tile sizes.
From a UX perspective, this button introduced a new affordance in the home screen (letting users know that the home screen isn't all there is). The arrow is an actual button too, meaning users can discover that there's another screen without necessarily invoking a side swipe. I have long since customised my home screen on my Windows Phone, but if I remember rightly the Settings app wasn't on the stock home screen, so switching to the app list is an important thing to learn how to do.
There's an aesthetic reason for this too; Windows Phone uses asymmetry as a design trope throughout the whole OS, largely because the interface is highly typographic (and the typography in the Metro design language itself is left-aligned).
As stated above, this element has been removed in Windows Phone 8 and Windows Phone 7.8. In my opinion, the asymmetry added visual interest in a more pleasing way than the new home screen.
The reason for the arrow is that they have chosen to use that indicator as a cue that there is more content in the direction where the arrow is pointing, and that the user has to pan/swipe to reach it.
My conclusion is that they chose the arrow because it's subtle and will allow for more white space in the view, which evidently relieves stress on the user.
As you mention, another cue could have been to have the additional content painted but faded out towards the side, and thereby cueing that there was more content to the side. Would that be more clear/noticeable? Well, yea I'd say so. But that would also clutter the view and could also be perceived as obstructive.
After all, when a user of the platform has had some time with it they will not need more than that subtle icon to indicate that there is more content. Then the views can be kept cleaner and the user experience calmer.
Reasoning behind placement and layout of the Windows mobile arrow button: