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Microsoft Takes Lead in Software For Handhelds

Overall Market Shrinks As Smart Phones Gain

By Mike Musgrove
Washington Post Staff Writer
Saturday, November 13, 2004; Page E01

Microsoft Corp. is no longer an also-ran in the market for handheld-computer software. For the past three months, gadgets running the software giant's Windows Mobile operating system outsold Palm handhelds, finally overtaking a rival that first popularized the electronic datebook organizers in the mid-1990s.

Microsoft unseated the Palm system with worldwide sales of more than 1.3 million units over the third quarter of the year, compared with slightly more than 850,000 for the Palm, according to a new report from research firm Gartner Inc.

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Capitalizing on its dominance in the PC world, Microsoft appears to be gaining influence in yet another product category, much like it did when it conquered the market for Internet browsers.

But Palm partisans said this battle is different, in that the overall size of the handheld market is declining as more consumers shift to cell phones, MP3 players and other gadgets that incorporate electronic organizer features.

Sales of smart phones edged past handheld sales last year, for a total of about 13 million phones compared with 11 million handhelds worldwide, and smart phone sales may be on track to double this year. Sales of handhelds have drifted downward every year since 2001.

"Every time someone buys a Palm OS [operating system] smart phone, that's one person less buying a Palm OS handheld," so shrinking handheld numbers are "what you would expect," said Michael Mace, chief competitive officer for PalmSource Inc., which makes Palm software.

Mace said his company derives more revenue from smart phone sales than from handheld sales; the Treo, a smart phone from PalmOne Inc., a Palm hardware company, has been well received by consumers and sells about 300,000 units a quarter.

Windows handheld software was, for years after its 2000 debut, scoffed at by gadget reviewers, who almost universally favored the greater ease of use offered by the Palm operating system. And for years, Microsoft's software trailed far behind the popular Palm operating system in sales.

But Microsoft has been able to forge ahead by focusing on corporate customers, who favor the software giant's handheld operating system and applications because they are similar to the software that runs Windows networks and desktops. Some of the same tools that tech teams use on their desktops or laptop computers can be run via Windows Mobile handhelds too.

"The familiarity is really making [Windows handhelds] an easy thing to adopt," said Jerry Hamrock, an executive at Dell Inc. who manages the computer maker's line of Windows Mobile-using handhelds.

Microsoft has worked to steadily improve its software as well, while some analysts said PalmSource has run into difficulties. PalmSource's latest operating system is a product it calls Cobalt. The software adds enhanced graphics to the operating system and lets users run more applications simultaneously. While the advances are seen by some as a technological breakthrough, no device manufacturer has used it yet in its lines. Mace said he expects new products running Cobalt to hit the market early next year.

PalmSource's market share was also recently hit by the exit of consumer electronics giant Sony Corp. from the market. Sony's Clie once sold about 1.2 million units a year, according to Gartner, and the company was one of the first Palm makers to include cameras and digital music players in its systems.

Such extras are now commonplace in the handheld market. Despite Palm losing the sales edge for the three months ended in September, Gartner analyst Todd Kort said, he wouldn't be surprised if it retakes the lead in the fourth quarter. Palm handhelds are more popular with consumers, and more Palm-using devices are available for under $250. Most consumer handheld purchases, in years past, have taken place in the holiday season.

But Kort does not forecast growth for the handheld market overall. "Its sort of sad to see how rapidly things are unraveling," Kort said of the market. "There's all kinds of scenarios you can play out and most of them are not positive for [handheld] growth."

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