META Report: Pocket PC 2002: An Evolutionary Advance

During the past two years, Palm has failed to solidify its originally large lead (90%+) in the PDA space against a Microsoft-based competitor that was lacking in features, functions, and performance.

Indeed, early versions of Windows CE (WinCE) and Pocket PC were not well received. During the past year, however, new software and hardware has helped Pocket PC gain a significant share of the enterprise (15%-20%), primarily due to Palm’s failure to upgrade its devices and OS as well as its poor enterprise-oriented support programs.

We expect Pocket PC to continue its market share increase (due to better integration with Windows-oriented systems, greater expandability, and “higher end” performance), achieving 45%-50% enterprise penetration by 2005/06. During the next two to three years, we also expect increasing diversity in WinCE-powered devices (such as vehicle-based telematics, kiosks, “Stinger” smart phones, and wireless terminals), further expanding Microsoft’s overall market. However, we expect Palm to remain strong in the lower-end, personal information management (PIM)-oriented market in enterprises as well as in the consumer market where enterprise-level functionality is not usually required.

We expect the Pocket PC to appeal primarily to enterprise users, where its relatively high cost ($400-$700) and feature-rich environment is not a hindrance, compared to cost-driven consumer expenditures where Palm and Handspring compete fiercely for market share and where new low-cost entrants are beginning to appear at $100-$150. While these low price points may lead some users with marginal needs to purchase and deploy their own units for PIM functions, enterprises that justify deploying PDAs should ultimately standardize and supply devices to users who require higher levels of capability, despite the higher cost of Pocket PCs

Pocket PCs (and earlier WinCE) have been criticized for their relative operational complexity and lack of simple facilities versus rival Palm. In Pocket PC 2002, many of these operations are simpler and more user friendly; while its interface is still more complex than the Palm, it also offers much greater capabilities. Indeed, with Pocket Outlook, Pocket Word, Pocket Excel, and Pocket Internet Explorer, enterprise users find a close affinity to the Microsoft-dominated PC world and an easy connection for Exchange users.

With Pocket PC 2002, Microsoft’s new reference design has forced all manufacturers to move to an ARM core-based processor. The beneficiary of this decision is primarily Intel (Strong ARM and soon XScale processor chips). Indeed, every new Pocket PC utilizes this chip, versus the past when only Compaq employed it. This standardization benefits software vendors, which now need to supply compiled programs in only one flavor – putting Pocket PC on equal footing with Palm-powered devices.

Microsoft has also mandated that all Pocket PC 2002 PDAs use flash ROM to hold the operating system. Although this adds to the unit’s price ($25-$50), it enables the vendors to provide downloadable OS upgrades. Owners of PDAs that do not use flash ROM cannot upgrade their systems and must buy a new unit for the latest software version (potentially requiring replacement of a $500-$600 device). Manufacturers moving to flash memory will alleviate this problem. It will also enable them to add enhanced features and functions more easily, and to upgrade those functions, including customizations for particular enterprise users (e.g., special screens, customs portals, drivers).

Microsoft’s focus on the enterprise is evident in its strong support for multiple networking technologies. Microsoft has added drivers for both Bluetooth short-range wireless and 802.11b wireless Ethernet, enabling Pocket PCs to run either built-in wireless modems (in future units not yet on the market) or modems on cards. The latest version also supports virtual private networks and has a Windows Terminal Server client included, to provide network encryption and strong authentication to corporate networks as well as to enable thin-client access to enterprise applications.

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Pocket PC has lagged Palm in the number of third-party software developers selling products, but this too is changing. Despite Palm’s early lead in development support, Microsoft has an incredibly large audience of potential developers already using its development environments (e.g., Visual Basic). As it adds libraries and tools specific to Pocket PC, it will rapidly surpass Palm in enterprise software deployments. For enterprises already deploying VB-built apps, setting a switch to output applications for the Pocket PC along with full Windows clients will be trivial, though some modification for I/O limitations is warranted. Further, Microsoft is producing a version of .Net Compact Framework to work with the Pocket PC (and other WinCE platforms), giving these devices an advantage over Palm in future .Net environments.

Microsoft has also improved remote manageability features on the Pocket PC, including hooks for security software. PDAs face two important security challenges. First, like desktop computers, they are vulnerable to virus and worm attacks – though only a few, minor attacks have materialized so far. However, by their nature, they are less susceptible than desktop systems, because PDA users regularly back up (synchronize) their data to desktops or servers. Thus, they can always wipe the memory of their PDA and reload their last backup if a virus does attack. Although some antivirus software has appeared for Palm (e.g., Symantec), we see this as a fairly low-risk situation for the next one to two years.

The larger danger is theft or loss of PDAs with sensitive corporate data. The main protection against this problem is encrypting the data on the unit, or removable data storage (e.g., CompactFlash). Although several solutions are available for both the Pocket PC and Palm platforms (e.g., Certicom), few users have encrypted their PDAs because of the inconvenience. We do not expect this to change until enterprise policies are forced on the user.

Business Impact: Increasingly capable PDAs will ultimately lead businesses to deploy enterprise workforce-specific applications (e.g., field force, sales force automation, service) on these devices for selected mobile workers, potentially replacing much more costly notebook PCs. This will lead to a more connected and mobile workforce, but will also force companies to expend additional resources for application development, deployment, and support.

Bottom Line: The increased processing power, upgradability, and manageability of Pocket PCs will be attractive to enterprises – despite its higher cost versus its primary competitor (Palm-based units). We expect most enterprises to standardize on Pocket PC as the platform of choice for enterprise applications beyond simple personal information management.