The first handheld gadgets to play music and movies on Microsoft Corp.'s (MSFT ) "iPod killer" software will be available in Europe in the second half of 2004, the world's largest software company said on Thursday.

The gadgets will run on Microsoft's yet-to-be-unveiled Portable Media Center software in a direct assault on the iPod (search), Apple Computer Inc.'s (AAPL ) hot-selling digital music player.

Working with a host of manufacturing partners, Microsoft is introducing a device that plays movies and stores digital photos as well as songs in a bid to grab a share of the fast-growing digital media player market.

"We think this is going to be one of the hot devices for Christmas 2004," said James Bernard, product manager for Portable Media Center. The U.S. software giant has enlisted Creative Technology Ltd. (CREA) and Korea's Reigncom Ltd.'s iRiver International (search ) unit to develop devices for the European market.

Microsoft said the Creative devices will be available in Sweden, the United Kingdom and Denmark first, retailing for between €550 and €599 and £399 and £449.

The product will be available in Germany, France, Italy and Spain to follow, but also by year-end, Microsoft said.

Price details and retail launch dates were not available for the iRiver device.

FATTER THAN THE IPOD

The Creative players will be sold with 20 gigabytes or 40 gigabytes of storage capacity, the latter would provide 175 hours of video playback or 10,000 songs, Microsoft said.

The devices play MP3 files as well as audio and video content recorded in Microsoft's digital format. The devices run on the Windows CE operating system.

The Creative player weighs in at 330 grams (11.5 ounces) — roughly three times as thick as an iPod and roughly twice as long to accommodate its television-quality color screen. It has a USB port and comes with audio and video outputs cable to play media on a television or stereo hi-fi.

Microsoft will be up against Paris-based Archos Inc (search)., one of the earliest entrants in the multi-media player market, and Dell Inc. (DELL) to grab a piece of a market that some analysts predict will not take off for a few more years when consumers become more accustomed to saving video content on their PCs.

"I don't think these devices will be changing the consumer electronics landscape in any way this year. By definition, they just don't have widespread appeal," said Mark Mulligan, an analyst with Jupiter Research in London.

But longer term, Microsoft is betting heavily on its strategy to create devices that plug into their computers from which they can store and access all their entertainment content.

Microsoft's Bernard envisaged a scenario where the owner of a Portable Media Center gadget would be able to store hours of their favorite music and movies on the device. They could then download from a news-oriented Web site a round-up of the day's news to watch on the train.

To that end, Microsoft is busy assembling media partners to provide content including movies, music videos and news. It has signed up music label EMI (EMI) and digital music outfit Napster (ROXI).

Bernard said more media alliances will be announced closer to the launch date.