In less than two years, Palm Computing has created a thriving business in hand-held computers nearly from scratch. Next month it will reap the reward for success in the electronics industry: competition from Microsoft.
Microsoft's Windows CE 2.0 - the revamped, Lilliputian version of its popular operating system - is the foundation for a crop of electronic organizers that look an awful lot like PalmPilot knockoffs. These devices will begin shipping from heavyweights like Casio, Philips and Uniden as early as next month.
The PalmPilot, whose manufacturer was acquired last year by 3Com, came from nowhere to grab two-thirds of the market in hand-held computers. But it was vying mostly against bulkier, expensive mini-laptops. In contrast, the Microsoft-dubbed Palm PCs match the PalmPilot's combination of small size, low price and clearly focused functions: an electronic calendar, phone and address list, memo pad and expense tracking.
The competition promises to be intense. Both sides are pouring money into marketing campaigns. And last month, 3Com sued Microsoft, alleging trademark infringement over the Palm PC moniker.
"It's daunting to have to face off with Microsoft but even worse when it's a group of competitors backed by Microsoft," said Rob Enderle, director of desktop technology with Giga Information Group.
For consumers, the choice between PalmPilot and Palm PC may come down to the ease-of-use and popularity of the 3Com product vs. the established appeal and versatility of Windows, analysts say. At the moment, many believe 3Com and its Palm Computing division have the upper hand.
Mushrooming market at stake
At stake is a mushrooming market for hand-held personal organizers, which is estimated to grow more than 60 percent over the next year. The number of hand-held computers sold in the first six months of 1997, the most recent period for which firm figures are available, exceeded the sales totals for all of 1996. By 2001, sales are estimated to quadruple to almost 7.5 million annually, according to research firm Dataquest.
In a speech to a banking trade association last week, Microsoft Chairman Bill Gates said he expects hand-held computing devices to eventually become as popular as full-size personal computers.
"It strikes at a fundamental human need to be organized," agreed Donna Dubinsky, president of Palm Computing. "It's designed for people who are mobile and have a degree of complexity in their lives."
The revolutionary notion of shrinking the personal computer to palm size emerged from the intellectual ferment at Apple Computer. The Cupertino, Calif., computer manufacturer unveiled the first true hand-held device in 1993, to much fanfare. But Apple oversold the concept and underdelivered. The Newton MessagePad flopped. Though later models were vastly improved, Apple ignominiously axed the product earlier this month.
A cult phenomenon
Other hand-held devices from major companies also faltered, so badly that analysts began to wonder whether hand-held computers could ever be a viable mass-market product. Then came the PalmPilot, which eliminated the bulk and superfluous features of earlier versions and became a cult phenomenon.
Introduced in April 1996, more than 1.6 million PalmPilots have been sold, according to data from research firm Creative Strategies. Palm Computing has realized more than $300 million in revenue from the product and launched the third generation of the device, the Palm III, last week.
The Palm III hits store shelves in April and features a new design, increased memory and an infrared beaming function that lets users swap information from within feet of one another.
But the larger measure of its success may be that it attracted attention - and then competition - from industry giant Microsoft.
The Redmond company also first entered the hand-held market in 1996. An early version of its Windows CE became the backbone of 10 mini-laptops from different manufacturers, equipped with keyboards and limited versions of Windows programs. But these devices captured just 20 percent of the market.
Microsoft's second shot
Now Microsoft is taking a second shot. It announced in January that it was working with consumer electronics companies to produce the devices now known as palm-tops.
Microsoft's Palm PCs are virtually identical in appearance and basic features to the PalmPilot.
Both use an inkless pen called a stylus for data entry. Both offer an electronic cradle to synchronize information between the desktop computer and the palm device. And the products are priced in the same range as well. The Palm III is retailing at $399; earlier PalmPilots are now as low as $199. The price tag for Palm PCs are between $299 and $499.
Palm Computing executives say Microsoft is so interested in imitating their success that the software company has even cribbed PalmPilot's name. It filed a trademark suit in Europe earlier this month. Bill Gates and other Microsoft executives deny the charge.
Some analysts believe the suit may be a mistake for Palm Computing because of the trouble it could cause for its parent company. 3Com's larger business is in networking devices, and its fiercest competitor there is Cisco Systems, the leader in Internet and corporate network equipment. It's been suggested that 3Com could use Microsoft's support to fend off Cisco; an aggravated relationship with its potential ally won't help, said Giga's Enderle.
But Dubinsky said Palm has no choice but to defend its rights.
"You can't have a good relationship with Microsoft unless it's from a position of strength," Dubinsky said. "Otherwise, they don't respect you."
The Windows factor
Ultimately, the war between PalmPilot and Palm PC will be won on different grounds.
Microsoft is banking that consumers will choose Palm PCs because they want the familiar Windows interface - even though it comes on machines that can't run Windows applications .
Microsoft hopes to turn added features into a Palm PC advantage, and it's loading its machines with functions. Some of the first Palm PCs have a larger memory and more powerful processor than anything Palm Computing makes, allowing them to run such sophisticated software as a full-blown handwriting recognition program. PalmPilot users, in contrast, enter data with the stylus using a specialized language called Graffiti.
For now, Palm Computing has a clear advantage, industry watchers say. It's got time and practice on its side - and a large and growing customer base. Because of the head start, the PalmPilot has more than 1,000 software applications that have been developed to enhance its operation. In contrast, Microsoft is releasing only 100 applications for the Palm PC in the first few months.
"We have the advantages of being the innovator, of owning the technology and understanding the market better than anybody else. We've been aggressively building over the last two years," Dubinsky says.
"They're shooting at a moving target."