August 5, 2002 6:51 AM PDT

Handheld makers feel a pinch

Ever so slightly, Microsoft strengthened its handhold in the handheld market during the second quarter.

Devices based on the software giant's Pocket PC operating system made a small gain against the Palm OS during the quarter, according to a report released Monday by Dataquest, a unit of market researcher Gartner.

But each operating system camp felt the pinch--the Palm OS from declines in unit shipments from Palm and Handspring, and Pocket PC from the consolidation of Hewlett-Packard and Compaq Computer.

Personal digital assistants based on the Palm OS held 50 percent of the worldwide PDA market, with about 1.35 million units, during the second quarter. Devices based on Microsoft's Pocket PC and other Windows CE-based software mustered a 2.6 point gain to 28 percent of the worldwide market, while PDAs using custom operating systems held steady at about 20 percent of the worldwide market, Dataquest reported.

Overall, worldwide unit shipments declined by 3.5 percent to 2.7 million units compared with the second quarter of 2001, as many buyers waited on new units that will incorporate Palm's OS 5 or Intel's new XScale processor, Dataquest reported.

Palm and HP were the top two PDA manufacturers, with 30 percent and 16 percent of the market, respectively. But it was the little guys, Sony and Toshiba, who bolstered each of the main operating systems.

Third-place Sony, whose unit shipments jumped 348 percent year over year to 277,315, or 10.2 percent of the market, carried the torch for the Palm OS. Meanwhile, newcomer Toshiba shipped 105,798 Pocket PC devices, good enough to capture 3.9 percent of the market and fifth place worldwide, to help advance the Microsoft cause.

At least part of Sony's success can be tied to the Clie NR70V, which integrates a digital camera. Toshiba benefited from a combination of low price, performance and slim form of its e310, Dataquest said.

Every other handheld maker in the top five saw a falling off in unit shipments.

Market leader Palm declined by 9 percent, year over year, shipping 818,800 units. Shipments from second-place HP's fell 31 percent to 431,650. Fourth-place vendor Handspring's shipments dropped 30 percent to 212,000.

HP was able to edge Palm in revenue for the quarter, however, reflecting the higher selling prices of its iPaq and Jornada devices. HP took in $220 million versus Palm's $217 million. The entire market was valued at $902 million, up 1.5 percent year over year.

Otherwise, the market had a pretty stagnant quarter, Dataquest reported.

"Palm and HP did not ship in volume any new models during the quarter. The decline in (HP) Jornada and iPaq shipments from a year ago is largely a result of economic conditions, relatively high prices and lack of diversity across their product line," Todd Kort, an analyst at Dataquest, said in the report.

"Customer anticipation of new Pocket PC models based on Intel's XScale also delayed some sales," he continued. "Likewise, the release of Palm's OS 5 in early June is putting a damper on sales in this category until new PDAs using this software and new ARM-based processors are ready in a few months."

As a result, manufacturers will have to cut costs and become more aggressive on pricing to win customers. The manufacturers also face possible competition from Dell Computer, which analysts conjecture is crafting a low-priced PDA based on Pocket PC.

"We believe that there is a large amount of pent-up consumer demand that can be unleashed in the last few months of 2002 with more competitive pricing and especially if the economic outlook improves," Kort said.

 

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