How the mighty Microsoft may hold the fate of Psion in the palm of its hand

Software giant's Pocket PC could take a bite out of the market leaders - just as it did with Apple in the 1980s

Psion, the maker of personal organisers and a key producer of next-generation mobile phone software, is about to get a raw lesson in the application of dominant commercial power - courtesy of Bill Gates.

Psion, the maker of personal organisers and a key producer of next-generation mobile phone software, is about to get a raw lesson in the application of dominant commercial power - courtesy of Bill Gates.

For the UK company and for Palm Computing - maker of the Palm Pilot, until now Psion's chief rival - that is the consequence of Microsoft's launch yesterday of its latest version of Pocket PC software. More than 60 companies, including PC market leaders Hewlett Packard and Compaq, lined up to launch products based on Pocket PC, which uses Windows CE, a stripped-down version of the ubiquitous PC operating system software.

The new version of Pocket PC software can play music in the MP3 audio format, display electronic books and play video clips. Compared with the first two versions of the software, it also has an easier-to-use interface for retrieving personal contacts, schedules and lists. The software includes a Web browser derived from Microsoft Explorer, the market leader.

Greg Levin, director of marketing for Microsoft Europe, said: "With our partners, we think we're bringing quite a significant product to the market." Without giving exact figures, he said Microsoft had invested "tens of thousands of man hours" and "millions of dollars" in the Pocket PC.

That commitment has seen a host of companies scramble to get aboard what could be the next Microsoft juggernaut. Besides PC builders, a host of enterprise software makers, including market leader SAP, and other electronic goods makers such as Casio, have joined in the launch.

The devices, which will appear in the shops in May, are expected to cost from £300 to more than £400 depending on the size of memory and other features. Higher-end models will offer colour screens.

Compaq's Aero 1550, which weighs less than 6 ounces and is about half-an-inch thick, will run for up to 14 hours and recharges automatically when the device is returned to its docking cradle. It has a slot that lets users add a 56k modem, more memory and peripherals.

HP's Jornada series, in addition to offering the Microsoft suite of applications, including Word and Excel, will feature Image Expert CE for viewing and editing digital images. There are plans to include wireless accessories for GSM networks as well as a Bluetooth module to enable wireless access to the internet.

Where this leaves Psion is difficult to fathom. Yesterday the firm, which leads the Symbian software alliance grouping together Nokia, Ericsson and Motorola, the three biggest mobile makers, chose not to comment.

Analysts who follow Psion appeared rather nonplussed by Microsoft's latest offensive. Jane Pierce of HSBC said her firm's "sell" rating on Psion had little to do with Microsoft. "It's really driven by a detailed valuation of Symbian's prospects," she said. "Doing that, we've come up with a share price that is a long way short [of the current price]."

Yesterday Psion shares closed up 15p at 2,793p, but they are 62 per cent down from their February high of 7,270p.

Other analysts who back Psion are equally unfazed. "I still think Windows CE is a non-runner," said one specialist who rates Psion a "buy". "It just gobbles up too much power," he said.

US analysts, however, are less inclined to rule out Microsoft making rapid gains in the hand-held devices segment, a market where Palm leads, but in which Psion has sales of more than £150m annually. A study from International Data, a computer industry research firm, shows what is at stake: the hand-held market is expected to see sales rise threefold to £1.25bn in 2003 from £480m last year.

"The Pocket PC is a significant improvement over prior releases of its CE operating software," said Michael Gartenberg, vice-president of research for Gartner Group, a technology consulting firm. "Microsoft is doing as much as it can to throw as much technology into the box as possible. Palm ought to be running scared. They haven't shown a clear path to include this kind of functionality."

Mr Gartenberg noted a similarity to another Microsoft competitor - Apple Computer. "In the 1980s Apple was the technology leader for a long time, then just stagnated and let Microsoft beat them," Mr Gartenberg said. "The same could happen here."

Although Psion has carved out a profitable niche, the US computer industry is littered with the casualties created when Microsoft decides to target a market. Now the software giant is aiming to integrate Pocket PC software with its dominant PC operating system and applications position, as well as its growing computer server market share.

In a publicity coup for Microsoft and a slap in the face for Psion, the Royal Mail came forward yesterday to endorse the advantages of using the Pocket PC to boost efficiency in the operation of its maintenance program. "The Pocket PC is small, light and easy to use," said Andy Duckworth, a Royal Mail project manager. Other users include Dresdner Bank and car rental group Avis.

If the scale of the Pocket PC launch, at simultaneous evening events in London and New York last night, is daunting, Microsoft was careful to rule out any plan to colonise the mobile devices market. "Our sense is that customers have a wide range of device preferences," said Mr Levin. "There is not just one device that will succeed," he said, noting that consumer demand is likely to support cheap mobile phones and deluxe mobiles offering WAP, as well as a Pocket PC that is also a phone.

Yet David Potter, chairman of Psion, would be foolish to underestimate Microsoft's challenge. Mr Levin, for his part, believes the software giant will overtake Palm, never mind Psion, "within two or three years". Industry watchers are more cautious, but acknowledge that Microsoft is likely rapdily to expand its approximate 10 per cent share in the hand-held market.

Diana Hwang, analyst with International Data, said Microsoft appeared well positioned to encroach on Palm and Psion. Within three years, she predicts that hand-held machines using Microsoft technology will account for 40 per cent of the market, compared with 58 per cent for those operating on Palm software.