by Ephraim Schwartz June 2, 1999 Web posted at: 12:18 p.m. EDT (1618 GMT)

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INTERACTIVE Which handheld OS do you prefer? Palm Win CE Other View Results

(IDG) -- As Windows CE developers get set to gather in Denver next week for a Microsoft-sponsored conference, the company is quietly rethinking its entire approach to the hand-held market.

In fact, Microsoft is already telling key partners that in the fourth quarter they should expect to see a total rewrite of WinCE, code-named Rapier, which will be significantly easier to use.

For Microsoft, ease of use has been a major stumbling block that has kept market acceptance of its hand-held platform low, and the software giant's biggest challenge next week will be convincing software vendors and corporate customers to continue to support the WinCE platform.

Microsoft's problem is that the lure of other operating systems is growing. Market researcher International Data Corp., in Framingham, Mass., says research figures for 1998 point to an almost 2-to-1 sales advantage for PalmOS and show that devices running PalmOS grew by as much as 84 percent in 1998.

Some software vendors that market similar business applications for both WinCE and PalmOS are claiming an 8-to-1 advantage in PalmOS software sales.

Recent research also points to the primary reason for the disparity in sales.

"The vast majority of users cite the simplicity of the PalmOS and the complexity of WinCE," said Ken Dulaney, vice president of mobile computing at the Gartner Group, in Stamford, Conn. "This has registered deep within the bowels of Microsoft. If it means they rewrite the interface [to increase market share], they'll do it."

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As part of that effort, Microsoft plans to leverage both its engineering and marketing assets.

"They are figuring out how to keep the Windows brand and change everything else," one source said.

At the same time, Microsoft plans to unveil yet another massive marketing effort whose budget will rival that of the launch of Windows 95, industry sources said.

One of the key issues facing Microsoft is the lack of compatibility between WinCE and the other Windows platforms.

"Pocket Office is about a quarter compatible with Microsoft Office," said Dulaney, who noted that attached files created in one version of Windows and sent via e-mail may not be compatible with the WinCE version.

Less than full functionality for WinCE applications is a deliberate marketing decision on Microsoft's part, according to Matthew Nordan, a senior analyst at Forrester Research, a market research company in Cambridge, Mass.

Hardware OEMs pay twice as much for Windows 95/98 as they do for WinCE.

"If WinCE devices cannibalize PC laptop sales, Microsoft's profits get eroded," Nordan said.

To ensure this does not happen, Microsoft handicaps the OS by limiting features of Pocket Office programs, according to Nordan.

Analysts said IT managers do not have the time to consider all of the exceptions to compatibility between WinCE and Windows NT.

"With PalmOS it takes one or two clicks; with WinCE it's more like five or six," said Forrester's Nordan.

The only bright spot for Microsoft is in the vertical markets.

"They offer something Palm can't offer -- a broad, strong set of development tools to write custom apps and a large choice of hardware," Dulaney said.

However, some IT managers despair of ever seeing something from Microsoft that they can deploy companywide.

"The latest version of WinCE still suffers from the same shortcomings [as older versions]," according to an IT manager at a Fortune 500 company.

WinCE cannot access a script when dialing into CompuServe to access a corporate network, the manager said.

"This is a severe shortcoming on Microsoft's side, and I am really baffled as to how they will sell these into corporate accounts en masse if they can't support this kind of dial-up," the manager said. "They are assuming you are dialing directly into an RAS [remote-access server]."

In the meantime, Microsoft appears to be losing ground on yet another small-device battlefield.

While Microsoft continues its internal debate over whether to design a version of its WinCE operating system for smart phones, the Symbian alliance -- which includes three of the leading cellular phone manufacturers, Nokia, Ericsson, and Motorola -- appears to be settling on the EPOC operating system from Psion, another consortium member, for its smart-phone operating system.

"The Symbian OS has an almost solid lock on the smart-phone space," Gartner's Dulaney said.