Microsoft Touts Success of Pocket PC

It's not all gloom and doom in the handheld market. At least not from Microsoft's perspective.

On Tuesday, the software giant said worldwide sales of handheld computers using its Pocket PC operating system passed the one million mark in less than one year.

The announcement underscores the shifting landscape for handheld computers, which once were seen as an unstoppable growth sector. Industry leader Palm has stagnated as device sales slow and revenues from licensing its operating system level off. And a slowing economy has forced manufacturers to cut prices to reduce inventories.

After experiencing phenomenal growth, sales of handhelds will probably rise between 25 percent and 30 percent, down from earlier forecasts of 40 percent growth, says Todd Kort, a principal analyst at Dataquest.

"Reaching the 1 million mark in record-breaking time is a major milestone for us, but it's only the beginning as we see each month's sales continue to top the record set in previous months," says Ben Waldman, Microsoft vice president of the Mobile Device Division.

Price Wars

Last week Palm, saddled by inventory woes and slowing sales, halved its quarterly earnings forecast, sending its stock plummeting to a 52-week low. Meanwhile, Palm and chief competitor Handspring, which uses the Palm OS, have engaged in a price war.

Still, Palm executives expressed confidence that their company is setting the tone in the handheld market. "We feel we are still by far the standard handheld in the marketplace," says Michael Mace, chief competitiveness officer. "It's nice that [Microsoft is] happy about sales that they've managed to achieve, but we're very pleased with the momentum that we have."

To be sure, not all handheld sales are slumping. Compaq's IPaq handheld, powered by the Pocket PC operating system, is showing signs of strong growth. Sales of IPaq were up 89 percent in March, compared with a 16 percent growth for Handspring and 40 percent growth for Palm, according to NPD Intellect.

Going Corporate

"The problem for Palm is that they're playing at the low end of the market," Kort says. "They're not really addressing the corporate market very well. That's historically the space that Microsoft is strong with."

Microsoft doesn't seem to share that problem. The Redmond, Washington-based company says several major companies have committed to the Pocket PC platform during the past year, including Nabisco, Target, and Merrill Lynch Direct.

The news is especially embarrassing to Palm, which recently suffered a setback in its own attempts to woo corporate customers. On Thursday the company announced the dissolution of its deal to acquire Extended Systems, whose software was expected to help Palm gain a greater corporate presence.

Still, Palm is no slouch in the corporate space, with roughly 81 percent of all sales to corporate resellers in March, according to NPD Intellect, compared with 18 percent for Pocket PC devices.