Microsoft Windows CE received a stay of execution when the Pocket PC product line rejuvenated sales of Windows CE devices, despite heavy competition in a Palm OS–dominated market. According to International Data Corporation (IDC), the palm-sized Pocket PC devices pushed Windows CE's share of the Personal Digital Assistant (PDA) market from 10 percent to 18 percent during 2000.

IDC said Microsoft hardware partners—including Compaq, Casio, and Hewlett-Packard (HP)—that stuck by Windows CE last year saw sales more than triple compared with 1999 sales. This wild success caught at least one Microsoft partner off guard. Compaq shipped 75,000 Pocket PC devices in second quarter 2000, but that number was only a small fraction of the demand. The company's iPAQ Pocket PC was basically sold out for the duration of 2000. Units were selling on eBay for as much as $1000—not bad for a product that retails at $500. In response to the demand, Compaq ramped up production and quadrupled its output by first quarter 2001.

But the best news for Microsoft might be yet to come. IDC estimates that by 2004, Microsoft will have almost 40 percent of the market compared with Palm's 51 percent.

Still, the Palm OS is hardly in danger of being overrun by its competitor. Palm currently owns 74 percent of the market, and Palm devices outsell Pocket PC devices by at least 5 to 1. (According to Palm representatives, some estimates place the gap at as much as 14 to 1.) Pocket PC devices tend to be bigger, heavier, and more complex than Palm OS devices, and analysts say ease of use is the reason behind Palm's success in the market. But Pocket PC devices have full-featured Microsoft Office applications, full-color images, and streaming audio and video.

"People do care about features, but the features they care most about are battery power, size, and weight," said Palm's Michael Mace. "It's better to give people the basic platform and let them add software." Nevertheless, Palm seems to recognize the need to balance ease of use with a wider feature set. Like Apple Computer, Palm controls both the hardware and software sides of its platform, though it does license the Palm OS to other companies (most notably, Handspring and Sony). Palm's planned transition to a more powerful microprocessor line means that Palm products should be able to compete with feature-rich Pocket PC devices.

Whichever platform comes out ahead, the market for handheld computing devices is finally running strong. By the end of 2000, more than 9 million handheld devices were in circulation worldwide. IDC expects this figure to jump to more than 30 million by 2004, so with sales growth slowing in the PC sector, Microsoft is looking to the PDA market to keep sales numbers strong.