Microsoft Moves Forward In Embedded Market

In its hunt for sales growth, Microsoft is searching high and low.

As the software company looks for new sources of revenue to complement its expansive but stagnant PC software business, it is aggressively marketing operating systems and other commercial software designed to run companies' largest servers.

But it's also angling for a bigger share of the market for software that powers smaller, more specialized computers--handheld PCs and niche industrial control systems. It's one fast-growing segment of the client software market that Microsoft Corp. doesn't control, and the company is pulling out the stops to remedy the situation.

On Tuesday, in an effort to pump momentum into its plans, president and CEO Steve Ballmer addressed some 1,000 embedded systems developers at Microsoft's inaugural DevCon conference in Las Vegas.

"One of the most important competitive battlegrounds for our platform as we face the next five or 10 years is the embedded space," Ballmer said. "There's a new world emerging of smart devices. That is the future of computing."

Microsoft unveiled a program for chip vendors, the Windows Embedded Strategic Silicon Alliance, in which it will make more Windows NT Embedded and Windows CE source code available to Intel Corp., ARM Holdings PLC, Mips Technologies Inc., National Semiconductor Corp., and others to help those vendors optimize their products for Microsoft software. Microsoft said it's also in talks with Transmeta Corp. and Advanced Micro Devices Inc. about joining the alliance.

"We've come a little bit as a company in fits and starts," Ballmer said.

Microsoft is a relative newcomer to the market--Windows NT Embedded, which powers industrial controls, Microsoft's upcoming Xbox video game system, and other dedicated devices that use AC power debuted in 1999. Windows CE 3.0, the first version of Microsoft's system for battery-powered devices considered usable by developers, shipped in April. Market researcher IDC said Microsoft controlled just 8 percent of the $523 million market for embedded operating systems in 1999, and researcher the NPD Group said devices powered by Microsoft's PocketPC platform captured just 10 percent of hardware sales in the $1.03 billion handheld computer market last year.

"From Microsoft's point of view, it's important they control the embedded market as well as they control the [PC] client market," said IDC analyst Al Gillen. "I don't think that's going to happen."

In an interview, Ballmer dismissed the notion that Microsoft needs as much market share in the embedded computer systems market as it does in the PC sector to be competitive.

"Predicting that all markets are the same is kind of nonsense," he said.

Nevertheless, Ballmer said he believes Microsoft could one day control about 30 percent of the embedded market.

The nature of embedded systems is changing. Microsoft prefers the term "smart devices" to differentiate dedicated-task computers and general-purpose handheld PCs from earlier systems, which have operating system and instructions hard-coded into memory. Last spring, Microsoft concentrated its efforts in the market, rounding up its NT Embedded and Windows CE staff from various product groups and created an embedded and appliance platforms group. The company won't break out sales, but said revenue from embedded systems grew 300 percent during the second half of last year.

Ballmer also disclosed details for follow-up products to Microsoft's current offerings. Talisker, the code name for version 4 of Windows CE, is due to ship by year's end. It's scheduled to support Universal Plug and Play, a standard for communication between hardware, software, and networks; and the 802.11 and Bluetooth wireless connectivity protocols. Ballmer forecasts OEMs will sell more than 4 million units of PocketPC devices during the next year.

Windows XP Embedded, the successor to NT Embedded, is slated for release 90 days after the first shipments of Windows XP, previously code named Whistler. That means the embedded version will most likely ship early next year. Microsoft is designing the system to include smaller system components; support for the XML, Soap, and UDDI Internet protocols, and improved developer tools.