Microsoft’s New Rival to Palm Offers More Bells and Whistles

Microsoft Corp. on Wednesday will unveil one of the key elements of its strategy to fuse its software and services into the phones and hand-held devices of the wireless world: a new generation of hand-held organizers named the Pocket PC.

The devices will attempt to address the flaws that had caused earlier versions to fail and will try to grab market share from industry leader Palm Inc.

The Pocket PC will be larger than Palm’s top-selling products, but it will have far more power and be competitive in price, analysts said.

Palm’s top-selling Palm V personal information manager sells for about $450, comes with a black-and-white screen and is compact. The new and heavier Pocket PC, touting color screens and more features, will sell for $450 to $550.

The Redmond software giant is banking on the Pocket PC to put it back into the market for software that runs hand-held devices, a market in which Palm controls eight times the share of Microsoft. The hand-held market is expected to balloon to about $2 billion over the next three years, up from $764 million last year, according to International Data Corp., a computer industry research firm.

So far, the early reviews have been favorable.

“The Pocket PC is a significant improvement over prior releases of its CE operating software,” said Michael Gartenberg, vice president of research for GartnerGroup, a technology consulting firm based in Stamford, Conn. “Microsoft is doing as much as it can to throw as much technology into the box as possible. I think the reaction is going to be pretty big.”

Microsoft believes consumers will pay for features that expand the palm device from its role as a mobile calendar and organizer to one that offers an Internet connection, spreadsheet functions, music and video entertainment, and the ability to read electronic books.

“We think people ultimately want more than a personal information manager,” said Rebecca Boren, product manager for the Pocket PC. “We think they want more because their lives are more complicated.”

Microsoft is gambling that by offering many of the software features found in a desktop PC, the Pocket PC will have an edge over the dominant personal organizers from Palm.

The Pocket PC will include the ability to surf the Web, use Microsoft Word, edit Excel files and play classic games such as “Doom.” It also will offer such features as audio and video from Windows Media, electronic reading software, color screens and a 25% longer battery life.

Microsoft is going to need a big consumer reaction to close its huge gap with Palm in the hand-held device market.

Palm controlled 83.5% of the U.S. market last year, compared with 9.8% of the devices running on Windows CE, according to IDC. But Palm’s market share is expected to drop over the next three years. Windows CE machines are expected to grab 40% of sales by 2003, reducing Palm’s take to about 58%, according to IDC.

And Microsoft and Palm won’t be the only companies dueling for control of the hand-held device market.

Handspring, whose founders created the Palm, will roll out a high-end competitor this summer. The company has already launched its Visor, a low-end version that has been hurting Palm III sales. By the end of the year, Symbian, in conjunction with phone giants Ericsson, Nokia and Motorola, will unveil a wireless hand-held device.

“Palm is going to get attacked in the high end by Microsoft, Handspring and the Symbian group,” said Ken Dulaney, vice president of mobile computing for GartnerGroup. “They’ll be under tremendous margin pressure.”

For Microsoft, the Pocket PC must overcome criticism of earlier versions of Windows CE-based devices that experts and consumers blasted for being too heavy, badly designed and difficult to read. Poor sales prompted Philips Electronics to stop making Windows CE devices. Other companies, such as Everex Systems Inc., have not decided whether to support the new devices.

Microsoft officials say they have taken the criticism to heart and spent more than a year talking to customers, redesigning the software and working closely with hardware makers to get it right.

“We fully know we’ve been criticized a lot for our early versions,” Boren said. “We didn’t have it right before. We think we have it right this time.”

But this time, Microsoft worked closely with key partners Casio Computer Co., Compaq Computer Corp. and Hewlett-Packard Co. to ensure its new stripped-down software performed well on the new hardware designs.

“Now the Pocket PC has a combination that it never had before: really good software and really good hardware,” Gartenberg said.

The new devices still fall short of Palm’s personal information management features, which are more intuitive. Palm’s black-and-white screens are more readable in more lighting conditions, and its more elegant design and thinner size are other advantages.

“Windows CE devices have gotten favorable reviews, but Palm has the cult following,” said Dwight Davis, a technology analyst for Summit Strategies.

Still, the improvements are significant enough to prompt GartnerGroup to recommend that its corporate clients buy the Pocket PC. Gartner used to recommend only the Palm because the earlier Windows CE machines were so flawed that its business clients would stop using them after several weeks, Dulaney said.

“We’ve been pretty negative on these Windows CE devices, but for this release we are changing our recommendation,” Dulaney said. “We believe that the Pocket PC can be a productive tool for corporate users.”