Microsoft hopes that the Pocket PC 2002, unveiled at the DEMOmobile 2001 show in San Diego, will play a big role in its grand plan to chip away at Palm Inc.'s leadership in the handheld market.

The rollout signals a subtle shift in direction for Microsoft, which until now has tried to build a handheld platform that appealed to all potential users, from business executives to soccer moms. With the new release, however, the software giant is clearly homing in on customers who can buy the devices in volume as productivity tools for their companies.

"In the earlier release, we focused on the delivery of a great product," said Andy Haon, director of mobile device marketing for Microsoft (Redmond, Wash.). "Now, we want to get on the enterprise's 'blessed list.' "

At the same time, however, Microsoft surprised some industry experts by narrowing the list of processors that the Pocket PC will support from three down to one. Gone are the Hitachi SH-3 and MIPS cores, leaving only the processor cores from ARM Ltd. (Cambridge, England). The change eliminates support for processors used by two of Microsoft's biggest hardware partners. Hewlett-Packard Co. currently uses the SH-3 in its Jornada Pocket PC, and Casio employs a MIPS-based processor in its Cassiopeia.

Computing-industry analysts expect Microsoft's strategy to be a solid one, especially as the economic downturn continues to discourage consumers from buying handheld computers for personal applications. "The corporate market for handhelds is just starting to kick in now," said Todd Kort, principal analyst for Gartner Dataquest (San Jose, Calif.). "Long term, we expect to see Pocket PC overtake the Palm OS."

Slow start

Both Pocket PC 2002 and the Pocket PC operating system introduced in April 2000 are built atop Windows CE, acting as so-called "supersets" that add a variety of applications and software components on the CE foundation. At its launch, the Pocket PC system was seen by many analysts as an attempt to right the wrongs of Windows CE, which had been spectacularly unsuccessful in its early attempts to enter the so-called palmtop computing market. Analysts now believe that the newest version of the Pocket PC software will come closer to finding its niche in the handheld marketplace.

Like the earlier version, the Pocket PC 2002 is aimed at the higher end of the handheld computing market. Products that employ it are generally larger and have color screens, shorter battery life, higher price tags and greater functionality than the electronic organizers popularized by Palm. Pocket PCs also offer far more computing power than the lower-end palmtops. Using Intel's SA-1110 processor, for example, Compaq's iPaq handheld can operate at 206-MHz clock speeds. In contrast, low-end Palm systems employ a 33-MHz Motorola Dragonball processor.

The newest version of the Pocket PC operating system, however, promises even more functionality. Microsoft added support for Windows Media Video, including streaming video and improved electronic reading capabilities via a new Microsoft Reader. More important, the company has targeted enterprise customers by introducing the ability to connect to corporate information via a virtual private network. It has also made major development investments in connectivity by adding options ranging from local-area networks, such as 802.11b, and personal-area networks, such as Bluetooth, to wide-area networks.

With the Pocket PC 2002, analysts believe that Microsoft is laying the groundwork for more powerful wireless e-mail capabilities that could make Pocket PC handhelds appeal to large corporations with hundreds or even thousands of traveling executives.

"If you can marry all the organizer features to wireless e-mail capabilities, then a lot of senior executives will sign up for the service," Kort said. "Then they'll ask their corporate IT managers to support them when they have problems 'sync-ing' up to their company intranet."

Microsoft executives also hope to streamline their efforts, as well as the efforts of developers, by paring down their hardware support from three processor cores to one. They say that by going only with ARM-based processors, they simplify outside application development, cut their own costs and still provide hardware makers with a choice of chip set suppliers. The company's engineers are already working with Intel on its SA-1110 and Xscale processors, as well as with Texas Instruments on the ARM 920 processor core. Additional ARM-based chip set suppliers include Parthus, Agilent, SD Micro Electronics and Linkup.

Industry analysts said that they expect the vast majority of Pocket PC hardware makers to opt for Intel's StrongARM processors, however. "Microsoft will support all the ARM-based processors," said Alex Slawsby, analyst for smart handheld devices at International Data Corp. (Framingham, Mass.). "But right now, almost everyone is looking at starting out on StrongARM."

Microsoft said little about its reasons for selecting ARM-based processors over Hitachi- or MIPS-based processors. Intel engineers said that they believe the choice was based on performance and power efficiency of the ARM-based systems. The Intel StrongARM typically operates at about 1.3 to 1.5 Mips per milliwatt, they said, while much of the market ranges between 0.5 and 0.9 Mips/mW.

"Everything boils down to how efficiently you deliver your performance," said Tom Yemington, product-marketing manager for Intel Corp.'s Handheld Computing Division (Austin, Texas). "If wireless e-mail is your goal, then you're going to need really low power to make that happen."

Engineers at MIPS Technologies, however, said that the company's cores have been used in processors with efficiencies equal to, or better than, those of StrongARM processors. In the NEC 4131 processor, which is based on a MIPS core, power efficiencies have reached 1.54 Mips/mW, they said.

"It's hard to know exactly why Microsoft made this decision," said Colin McCracken, marketing manager for third-party relations at MIPS Technologies Inc. (Mountain View, Calif.). "But certain influential OEMs have made architecture decisions that weighed quite heavily."

Hitachi executives, too, said they didn't know the reason for Microsoft's decision and declined to comment. Executives from MIPS and Hitachi, however, both emphasized that their processor cores will continue to be supported in Windows CE.

Even though major manufacturers, such as Casio and Hewlett-Packard, now use other processors, analysts say that Microsoft's decision will not have a profound effect on sales of Pocket PCs. "It's not going to be a limitation for Microsoft," Slaswby said. "Eventually, you might even see Palm jump over to an Intel processor."

Analysts did say, however, that Microsoft's processor choice would have a near-term impact on consumers. "It's going to be to Compaq's advantage over the next month or two, because they already use the ARM processor," Kort said. "Existing users of the iPaq will be able to upgrade to Pocket PC 2002, or later to Talisker, whereas others will not."

Ultimately, analysts believe that Microsoft's strategies will help the company continue to close the longstanding gap with Palm. The Pocket PC last quarter grabbed 30 percent of the market, up from an earlier figure in "the teens" during the first quarter of 2001, according to Kort. Today, Palm still holds a 49 percent share, Kort said, but that figure has dropped from a steady level in excess of 70 percent during the last several years.

For that reason, many analysts believe that Microsoft's enterprise focus may continue to be the best way to chip away at Palm's dominance. "No one has hit on the feature that would be compelling for the soccer mom and soccer dad," Slawsby said. "When they do, the consumer space will be tremendous for handhelds. Until then, Microsoft is doing the best thing by hammering away at the enterprise focus."