Psion shares crash as Microsoft moves in on palmtop market

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PSION, maker of the eponymous hand-held computers, yesterday saw its market value plunge by a fifth after it warned that increased competition from industry giants such as Microsoft would hold back its growth in the coming year.

Shares in Psion fell 91.5p to 328p as chairman David Potter said the "continuing rapid change in palmtop markets" meant the company was "cautious" about the immediate outlook. However, he said Psion would "continue to invest and plan for the longer term with confidence".

The news came as Psion reported pre-tax profits down 29 per cent, to pounds 11.43m, for the year to December. The company blamed the fall on the strength of the pound, which it said had reduced sales by pounds 12m and profits by pounds 6m.

Experts said the fall was largely expected after Psion suffered a disappointing first half. Last year, the company warned that the launch of its new Series 5 hand-held computer had hit sales as the price of the older Series 3 was slashed and production problems meant Psion could not supply enough of the new machines to meet demand.

Instead, analysts said they were more concerned about increased competition going forward. The introduction by Microsoft of CE, its new operating system for hand-held computers, has spurred a number of electronics companies to launch palmtop computers to compete with Psion.

"Microsoft is the environment Psion now competes in," said Keith Woolcock, an analyst at Merrill Lynch. "Microsoft will set the standard and the pace and that means Psion's margins are on an inescapable cycle downwards."

However, Psion rejected the idea that it was locked in competition with Microsoft. The company argues that Microsoft CE is better suited to larger portable computers, known as "sub-notebooks" and in the digital set-top boxes which will turn television sets into interactive computers capable of surfing the internet. Meanwhile, Psion would continue to concentrate on palmtop computers that people could slip into their pockets.

Mr Potter said: "It is not our purpose to confront Microsoft. That's absolutely out of the question."

The Series 5, which offers users a full range of computing applications including a word processor, a spreadsheet and an internet browser, has been well received since its launch last year, winning numerous awards from personal computer magazines. Mr Potter said yesterday that the Series 5, which sells for about pounds 499, had overcome its early production problems and that Psion was expecting to ship, on average, 30,000 computers a month in the coming year.

The company is still selling its older Series 3 computer at about pounds 299 and the Siena, a relatively simple personal organiser, for even less. All in all, Mr Potter said the company would sell about 450,000 machines in the coming year - up from about 360,000 in 1997.

Mr Potter said Microsoft's attempt to challenge Psion's market had not worked. "Microsoft's first entry into the hand-held personal computer market has not been successful," he said, adding that although Microsoft had sold a large number of licences for its CE operating system, machines using the software had not sold well and were being dumped on the US market for as little as $99.

Mr Potter said the proliferation of competing models had confused consumers and restrained the growth of the market. But industry experts believe Psion's Series 5 is proving too sophisticated for consumers, many of whom want no more than a machine they can use as an electronic diary and address book.

They fear Psion will have to cut the price of the Series 5 to get sales moving, thereby eroding its margins. Those worries have been fuelled by recent offers which package software and other accessories with the Series 5 but sell for the same price.

Yesterday, Mr Potter said the company would launch a big marketing push across Europe in the spring, and admitted Psion's strategy would be to be "aggressive". However, he would not give any details of possible price cuts.

Another reason for the market's disappointment was the absence of news about licensing deals for Psion's operating system, known as EPOC32. Last year Philips, the Dutch electronics giant, announced it had licensed the system for use in its new "smartphones" which will be a combination of mobile phone and electronic organiser.

Yesterday, Psion said it had licensed EPOC32 to another "global" company, but that the deal would not be formally announced before 1999.

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