Evidence mounts of exodus from Windows CE

Three years after its debut, evidence is mounting that Microsoft's efforts to spread the use of its Windows CE operating system to gadgets is not faring well.

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LAS VEGAS--Three years after its debut, evidence is mounting that Microsoft's efforts to spread the use of its Windows CE operating system to gadgets are not faring well.

The latest clues can be seen here at the Comdex trade show from the likes of Compaq Computer, Sony and Everex, another hardware maker that will stop making devices based on Windows CE, Microsoft's scaled-down OS. (See related story.)

To boot, Sony yesterday said Comdex: Closing the millennium it was licensing the Palm operating system from 3Com's Palm Computing for use in next-generation handheld devices.

"Microsoft is certainly down right now, about as far as they can go. But that can change," said Ken Dulaney, vice president of mobile computing research at Gartner Group. Microsoft has a good chance to make an impact with CE in other markets, he said.

Once considered a niche market, handheld devices have gained credibility and attention because of their growing popularity and an industrywide interest in accessing the Internet in new ways. Handhelds are considered by many to be the future of computing. The various devices from Palm Computer garner about 75 percent of that market, despite Microsoft's efforts to push CE.

Compaq, meanwhile, is straddling the fence on Windows CE. Microsoft's chief executive Bill Gates took the occasion of his Sunday night keynote to show off the latest addition to the Windows CE family--the MSN Web Companion designed to offer easy access to Microsoft's MSN Internet service.

But in 1996, Gates proudly pointed to the CE software powering new handheld computers. On Sunday night, he didn't mention Windows CE at all during the MSN Web Companion announcement. Nor did he mention that Compaq helped to design the device.

A possible reason for the omission: Compaq's version of the machine may not have a Microsoft operating system at all when it reaches the market.

Microsoft denied that Compaq was omitted: "Compaq has chosen to make a specific product announcement at a later date," a spokeswoman said. "For that reason, they chose not to be in our press materials."

Compaq co-developed the Web Companion, but it is "evaluating other operating systems," said Marc Warshawsky, director of Internet Appliances for Compaq. Compaq's plan is to make the device for telephone companies and Internet service providers but then let the other companies sell them.

Compaq will let the telcos choose which operating system they want, while the manufacturing partners announced by Microsoft will all use Windows CE and link to the MSN service. This could serve to limit the use of Web Companions by telcos such as AT&T, who have their own Internet service arm and may not want to share revenues with Microsoft.

Regarding Everex, Microsoft denied that any problems with the company's software led to the decision. In any type of market with multiple manufacturers, some will eventually drop out, said Brian Shafer, product manager for Windows CE.

"If you talked to Packard Bell, they'd say the PC is a failure," Shafer said, referring to the company's recent announcement that it is exiting the PC market because of poor sales.

Shafer further noted that Philips may have dropped the Nino, but it will be one of the manufacturers of the MSN Web Companion, which will run Windows CE. "You have to take it in context," he said. "More manufacturers bring more innovation to the market faster--people will come and go."

Compaq and others continue to sell palm-size PCs running Windows CE, and Microsoft has many other avenues for pushing the OS, including a $5 billion set-top pact with AT&T.

But Compaq's possible lack of support for Microsoft's entry into a new market is perhaps another sign that the company's efforts to extend the Windows brand "everywhere," as the saying goes, are running into roadblocks.

Web Companion may also have trouble at another Microsoft stalwart: Dell Computer. Chief executive Michael Dell was waxing eloquent about his company's future at a Comdex event today, but he didn't sound enthused about the prospects of the Web Companion.

"We're certainly not going to sell every [device] that comes around, and that may not be one that makes the list," said Dell.

Microsoft's strongest showing is in industrial, rather than personal, handhelds, according to Dulaney. "It's not something that they're proud of, but they are doing very well."

The problem is that there will only be an upside of around 300,000 units sold annually when that market matures in a couple of years, he said.

The recent defections of Everex and Philips from the palm-size PC market, along with Palm's growing momentum has led some to question anew Microsoft's chances for success with CE in the handheld market. Dulaney, for one, thinks their chance to become dominant in handhelds looks to have already passed as Palm and Symbian have gained credibility.

Part of the problem is of perception, to be sure. As it prepares to release an update to Windows CE, Microsoft marketing has shifted into low gear, so as not to take away sales from existing products. At the same time, Palm has kicked it up a notch, announcing a series of strategic alliances with giants such Nokia and Sony, licensing the Palm operating system to high-profile start-up Handspring and releasing new devices on an accelerated schedule.

News.com's Michael Kanellos contributed to this report. Stephanie Miles and Michael Kanellos reported from Las Vegas and Jim Davis from San Francisco.