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Microsoft Working on Upgrades of Windows CE, Mobile

While Microsoft Corp. (MSFT) has been beset by delays in its new operating system for personal computers, developers quietly have been working on a new version of another Windows, this one found in everything from sewing machines to sophisticated cell phones.

A beta version of the revamped Windows CE is due to be introduced to software developers at a conference Tuesday in Las Vegas. The update also will provide the basis for Windows Mobile, which is built for sophisticated cell phones but which even the company concedes can be clunky.

Users can expect to see products based on both systems in 2007, Microsoft says.

Microsoft is trying to conquer the growing market for high-end cell phones while keeping alive opportunities for Windows CE, a decade-old technology that the company has long pushed for small electronic devices. CE is used in such disparate devices as gas station pumps and TV recorders.

Analysts say the market has a lot of potential, although Microsoft has hard work ahead.

"The company's historically about what? Operating systems. And operating systems are used by more and more classes of devices," said Joe Wilcox, an analyst with Jupiter Research.

For now, Microsoft's mobile and embedded devices unit represents a tiny chunk of its overall revenue, just $89 million of its $10.9 billion total sales during the last quarter. The unit has not been consistently profitable, losing $14 million in the most recent quarter.

By comparison, the unit that includes Windows for PCs earned $2.5 billion in the quarter. A new version of Windows, Vista, is expected to be available for consumers early next year, missing the original 2006 goal.

Microsoft has helped device makers market an array of so-called "smart phones," the broad term for phones that can do things such as check e-mail and keep track of appointments.

In a major coup last year, Microsoft struck a deal with Palm Inc. (PALM) to launch a Windows-based version of the Treo smart phone, after years of battling against the traditionally dominant Palm operating system for handheld devices. The deal came after Palm had spun off its software division.

But now, Microsoft is facing stiff competition from Research In Motion Inc.'s (RIMM) popular BlackBerry, which has built a loyal following for checking e-mail on the go. It also must battle an array of other companies, all seeking to add even more functions to mobile phones.

Microsoft believes it has an edge in that its system is similar to the familiar Windows for PCs, and that Windows Mobile has the potential to offer more functions than some of its rivals.

The problem, however, is finding those bells and whistles.

Tim Bajarin, principal analyst with Creative Strategies, said it can take two to four button clicks to get to a feature on the current version of Microsoft's mobile operating system, but only one or two clicks to reach the same function on the Palm operating system. It also can be difficult to find and use non-Microsoft applications on the phones, he said.

For Microsoft, the challenge is, "How can we make services more discoverable, more accessible?" acknowledged Kevin Dallas, general manager for Microsoft's mobile and embedded devices group.

Such problems could be fatal in a market where devices are bought for convenience.

As people begin to use phones for more work tasks, Microsoft also is counting on some competitors to drop off. That's because it believes that outside developers won't want to customize their applications to work on a dozen different operating systems, and will instead just focus on a few major platforms. It's one reason Microsoft is working so hard to appeal to developers.

"I don't think there's going to be a huge number of players, just because the industry can't support it," said Suzan DelBene, a vice president in the mobile and embedded devices unit at Microsoft.

With Windows CE for other devices, like gas station pumps, Microsoft also is making changes that aim to please developers.

It's part of the company's strategy to beat some of its toughest competition — open-source technology, whose developers believe that software improvements should be freely shared. Microsoft follows a proprietary model, in which software blueprints are closely held.

The strategy of working with developers has been incredibly successful for Microsoft's Windows operating system franchise. But with CE it's more complicated.

Microsoft dominates the personal computer field, and most PCs are quite similar. But devices that could use Windows CE are far more fragmented. One company may be trying to create a smarter ATM machine, for example, while another may be seeking an in-home lighting and security system.

So while Microsoft contends that gadget makers would find it cheaper or easier to use an all-purpose operating system like CE with custom tweaks, analysts say that pitch is likely to face resistance.

While Microsoft is making inroads, analysts say that, for now at least, many companies likely will stick with homegrown or open-source systems that have worked in the past rather than gamble on a switch to CE.