The Handhelds Get a Grip

Computer makers move in on Europe's cell-phone market

Like many Europeans, Jaakko Kuosmanen long reached instinctively for his cell phone when searching for contact numbers. But now the Helsinki-based salesman for Finnish phone operator Sonera owns a new gadget: the pocket-size iPAQ from Compaq Computer Corp. It comes equipped with a Microsoft Corp. Windows CE operating system and a phone card that allows him for the first time to download Excel spreadsheets on the run and manipulate them on a palm-size screen that's much clearer and larger than his old phone's finger-size display. He's thrilled. "It's the perfect solution for our corporate customers," Kuosmanen says.

In a tech industry ravenous for growth, Europe's budding love affair with palmtop computers offers welcome relief. According to Dataquest, the European market for these gizmos soared by 129% last year, to about 2 million units. That's four times smaller than the U.S. market. But many of the devices Europeans are buying offer wireless access to the Net, a trend that may accelerate as the Old World rolls out the higher-speed wireless network known as generation 2.5. "Within a year, all these PDAs [personal digital assistants] will be phones," says Richard Lindh, marketing director at Microsoft's Mobility Solutions Group in Stockholm.

BEACHHEAD. That shift kicks off the long-awaited battle between the PC makers and the phone manufacturers. No one expects the computer crowd, led by Palm Inc. and Microsoft, to carve off the predominant part of the mobile-phone market with PDAs that double as phones. The cell-phone industry should produce 475 million units this year--nearly 40 times the size of the entire palmtop industry. But the PC makers are angling for the market's most profitable niche--corporate customers who want larger screens and more powerful devices than tiny mobiles. "They are hungriest for data applications," says Rob Edding, Compaq's European marketing manager for handhelds.

In this next stage of Europe's wireless Net, Microsoft is threatening to steal the march on archrival Palm. A giant in the U.S., Palm is only now bringing out its first wireless device built to European specifications. What's more, Europe's former PDA champion, Britain's Psion PLC, is faltering. Early this year, Motorola broke off a crucial project with Psion for a personal organizer that would double as a mobile phone. These weaknesses have provided Microsoft and its hardware partners with a chance to dig out a European beachhead. In the last two quarters, Microsoft-powered machines with hardware from Compaq and Hewlett-Packard Co. have raced from an 18% to a 34% share in Europe, almost twice the U.S. level.

For now, nearly all of these palmtops link with the Internet through slow cell-phone cards. Within months, though, as 2.5G networks spread through Europe, the new machines should be sprouting antennas that give them direct access to the wireless Web. And with the faster data speeds, workaday mobile applications should start making economic sense. Microsoft, for example, is carrying out pilot programs with European blue chips using PDA phones to link up far-flung sales and service staffs. "When Microsoft goes to Corporate Europe and says, `Look, these devices can really communicate with the PC and do much more than store addresses,' it's a powerful story," says Jeremy Davies, a partner at Context, a London market researcher.

The larger computer phones probably will complement, not replace, cell phones for now. Sonera's Kuosmanen, for example, uses the iPAQ for data and a regular cell phone for conversations. But PC makers are moving closer to talking machines. In ventures with Samsung, Sony, and Britain's Sendo, Microsoft will be releasing far more slender PDA phones by the end of the year. Powered by Stinger operating systems, these machines will offer color screens, calendars, contact lists, links to PC systems--all in a seven-inch cell phone. "This is going to blow people away," says Sendo CEO Hugh Brogan.

Not if Nokia Corp. can help it. The Finnish giant is cooking up its own offerings for 2.5G and planning to release them by the end of the year. Motorola Inc. is already wheeling out its own palmtop phone, the Accompli, with a touch screen and a clamshell lid. And Ericsson and Sony, which signed a joint venture in April, are sure to be hurrying work on similar machines. Those cash registers ringing up PDAs in Europe are merely the opening bells.

By William Echikson in Brussels, with Stephen Baker in Paris

— With assistance by Stephen Baker

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