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Windows CE faces technical hurdles

Microsoft's stripped-down operating system gets a huge boost with the AT&T deal, but some say it's better suited to handhelds than set-top boxes.

Microsoft's decision to invest $5 billion in AT&T means Windows CE will cut a wider swath, but some question if the stripped-down operating system is up to the task.

According to some analysts, See related story: The new world order Windows CE is weaker technically than other set-top box operating systems, and is better suited to handheld devices. But by virtue of the AT&T deal today, Windows CE gains a huge foothold in the set-top market.

Companies have been reluctant to adopt Windows CE because it lacks the ability to process commands under the strict definition of "real time," although Microsoft downplays those concerns. Also, because it hasn't been widely deployed as a set-top operating system, there is concern that the software isn't reliable enough to run for hours on end without having to restart the device.

Further, Microsoft's desktop operating systems are often derided as unreliable, and there is the perception that some of those issues could crop up in the set-top arena.

"CE certainly has been under a lot of scrutiny. The group has struggled, but their point of view is 'eventually, we'll get it right,'" said Michael Stanek, analyst with investment bank Lehman Brothers.

Microsoft introduced Windows CE in September of 1996, two years after dropping its first attempt at the handheld computer market. The Redmond, Washington, company dumped WinPad because its intensive memory requirements would have driven the cost of hardware too high.

In the handheld arena, Windows CE seems to have an easier row to hoe. When it comes to market share, CE-based devices are far behind the dominant Palm Computing handhelds, which use their own operating system. But CE-based handhelds are starting to close the gap.

Microsoft has previously acknowledged it is working out some of the kinks in the operating system, tweaking some problems with desktop synchronization and improving the interface.

The stripped-down OS offers some advantages See special report: 
When worlds collide for handhelds, compared to full-fledged operating systems. Windows CE offers "instant on," which is a bonus for anyone frustrated by the long boot-up time of most PCs, and much longer battery life than typical notebooks.

Microsoft has made it no secret that it covets the set-top market. Many industry observers believe such devices will be at the center of an emerging opportunity for interactive TV services, like Web surfing and video-on-demand, for example.

"If you look at the next wave of where computing is going, the set-top is the next wave," said Mark Bunzel of PricewaterhouseCoopers.

"It could be larger than the PC wave because it encompasses homes that already have PCs, [as well as] that segment that just isn't a PC type of household. It's a huge opportunity, and Microsoft has admittedly struggled to date to penetrate the cable market," Bunzel said.

To date, potential partners in this market have viewed Microsoft warily. These companies have largely perceived Microsoft as seeking exclusive control of set-top software, which could lock cable operators to its software in the future.

"This is a huge mindshare win for Microsoft," said Abhi Chaki, an analyst with Jupiter Communications. "This deal basically is a proof of concept towards services they can offer to cable, and it's important in terms of getting distribution in the consumer market."

"I don't think anybody would say it guarantees that Windows CE will be the de facto standard. But it gives Microsoft a tremendous foothold in the door at AT&T, and moves them to the front of the line," said Bunzel.

Standardization is another issue. The cable industry has been seeking to standardize set-top box technology, meaning that software from various companies would work with any set-top hardware. This has been hard to do.

"It really hasn't proven as easy to have multiple software suppliers in a single set-top box. The more software that's in the box, the more difficult it is to make them work together," said Cynthia Brumfield, principal analyst with Broadband Intelligence.

"This deal gives Microsoft a little more room to be the integrated software supplier," she said. A single solution is quicker, although Microsoft has a history of postponing releases of its software, which can complicate things.

News.com's Ben Heskett and Tom Dunlap contributed to this report.