April 19, 2000 2:10 PM PDT

Microsoft unveils anticipated Pocket PC for handhelds

Microsoft executives said they have learned their lessons the hard way in the market for handheld systems and will try to prove they're on track with Pocket PC.

The company today launched its new operating system for handheld devices, which is intended to carve a place for Microsoft in a market dominated by Palm. Pocket PC is the latest iteration of the company's handheld software strategy and the new brand name for its Windows CE operating system for palm-sized devices.

Among the improvements: Pocket PC contains a version of Windows Media Player and better email and Internet service, along with a completely redesigned interface.

Microsoft hopes to avoid previous missteps in a market in which it has yet to make more than a dent. The company controls an overwhelming share of the desktop operating system market and is making inroads in the server marketplace, but it is still just a blip in the handheld software industry.

"We've had some success but have not had the ability to inspire customers that we wished we had," Microsoft chief executive Steve Ballmer said at the Pocket PC launch this morning in New York. "(Pocket PC) is a giant leap forward."

Microsoft product manager Phil Holden added, "Our approach is to be modest and humble." At the same time, the company is aggressively targeting rival Palm in its advertising campaign, which features the tag line: "Can your palm do that?"

"I didn't expect it, but I think it was a good strategy," Jill House, an analyst with International Data Corp., said at the event. "They had to explain what happened."

Hewlett-Packard, Compaq Computer, Casio and Symbol are releasing new, slim handhelds in conjunction with the new OS.

Initial reaction to the new handhelds was positive, and many at the event mentioned a perception that the winds are shifting in the handheld market.

After the lackluster reaction to the Palm IIIc--the company's first device with a color display--and ongoing criticism of Palm's Web clipping service for its wireless Palm VII, many in the Microsoft camp predicted today that the momentum is on Pocket PC's side.

"This is the first time that I'd actually use one of these devices," said John Psuik, president of Developer One, a Windows CE software applications firm. "It's a lot better."

The relentless criticism of earlier versions of Windows CE has not fallen on deaf ears, according to Richard Doherty, an industry analyst and president of strategic firm Envisioneering Group.

"Version 3.0 is what version 2.0 should have been," he said. "I wouldn't say there are no compromises with this one, but the compromises are minimal."

Issues like problematic synchronization with the desktop operating system have been fixed, and interface and multimedia features have been updated. These fixes have given manufacturers such as Casio more confidence in approving large orders for Pocket PCs, which may alleviate the distribution and availability problems that have plagued Windows CE devices.

"The biggest drawback was not having enough," said Bob Smith, a product manager at Casio, who blamed the shortages on manufacturing issues and display shortages. "We expect it to grow considerably."

The stakes are high for Microsoft, analysts warn: Pocket PC could be the company's last hope of erasing the dismal sales and frequent customer complaints of previous handheld software efforts.

"I certainly regret that we are not further along in this marketplace, but the opportunities are really still before us," Ballmer said.

Ballmer said that the company "missed" on many aspects of previous handheld OS releases, including the design of hardware, software and personal information applications.

"The key is to take the best of what we had and marry it with the new," Ballmer said.

Microsoft executives say that Pocket PC will be a crowd-pleaser, with upgraded versions of Windows Media Player, new email clients and Internet browsers, and an easier-to-use interface.

"Two years ago we really see review: Pocket PC Arrivesbet on the fact that people (were) going to want to do more," said Phil Holden, group product manager at Microsoft, who said the company has learned from its mistakes. "In hindsight, we realized that our software experience was too complex, and from a hardware standpoint maybe we didn't have as good designs.

"We're really committed to getting market share back," Holden added.

Analysts said Microsoft has taken missteps with Windows CE--Pocket PC's predecessor--to heart. The company has made drastic changes to the core operating system, rewriting the code from the bottom up. In addition, hardware partners are improving their designs to better compete with the sleek Palm V, the best-selling product on the market.

"By the end of the year, Microsoft will go from being a relatively small player in the market to taking a significant amount of market share from Palm," said Michael Gartenberg, an analyst with Gartner Group. "It's going to be a huge success for the company."

The stakes are much higher now than when the company launched Windows CE in 1996. The handheld market has exploded, and many believe that wireless devices and personal digital assistants (PDAs) will become the prevalent method of accessing the Internet and corporate and personal information.

When it launched, Windows CE was expected to have an immediate effect on the handheld market, if not to dominate it altogether. The ability to tightly integrate handhelds to the desktop operating system, and the Windows interface specifically, was seen as giving Microsoft a huge advantage over Palm, which at the time was a relatively un-intimidating company subdivision in a still nascent market.

CNET TV: Palm Wars
CNET TV: Palm Wars

The exact opposite occurred, however. Palm continued to gain market share, signing high-profile licensing agreements with companies such as Handspring, Sony and Nokia. Meanwhile, Microsoft and Windows CE failed to make much of a dent in Palm's dominance and lost partners such as Philips Electronics and Everex, which dropped out of the market.

In 1999, Palm took about 70 percent of the handheld business, according to market research firm International Data Corp., while Microsoft and its three manufacturers took about 10 percent.

Microsoft's modest goals, to merely participate in the handheld market, reflect the rather large dose of humble pie the company has been forced to swallow. Since Windows CE's launch, customers have complained about the complicated interface, which Microsoft has blamed on an initial design mandate to replicate the desktop Windows interface on the handheld display.

The mobile device market also has changed significantly in the past four years, and Microsoft may be well positioned to take advantage of those changes, analysts say.

For example, Pocket PC includes upgraded versions of Windows Media Player, a new Internet browser and improved email software. On the other hand, Palm is just beginning to offer some of these features, mainly through its partners, according to Gartenberg.

"There's simply nothing else like (Pocket PC) on the market right now," Gartenberg said. "These are different competitive features, none of which are available on the Palm."

But Palm isn't exactly sitting on its laurels. The company announced yesterday that it will equip automobiles with docking stations for the Palm V. But where Palm is really making strides is in the handheld arena.

In addition to deals to create third-party wireless devices from Nokia and Sony, the company is making plans to integrate wireless Internet access throughout its own product line, an area where Microsoft is still lagging. Pocket PC will only be able to hook up to the Internet using a connection to a cell phone; analysts have pinpointed this as an area the company must target to remain competitive.

"This is a critical time for 'post-PC' devices and portables," said Billy Pidgeon, an analyst at Jupiter Communications. "This would be a great time for (Microsoft) to get it right."


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