Psion holds the line as Microsoft muscles in

The pocket PC leader is learning a hard lesson, writes Niklas von Daehne

PSION, maker of the world's most advanced hand-held computers, may be about to learn the same lesson as Apple Computer: having the best technology may not count for much if you compete with Microsoft.

Psion's Series 5, introduced last June, was a quantum leap. Its laptop- style keyboard, touch-sensitive screen and dictating capabilities offered a desktop computer's power and performance, yet it was small enough to fit into a shirt pocket.

Consumers bought the Series 5 faster than Psion could deliver them, and only now - 200,000 units later - is production catching up demand. Still, problems are mounting, with 3Com Corp's PalmPilot becoming the US market leader and the introduction of machines based on Microsoft's Windows CE 2.0 operating system crowding the market.

"Although Psion has very strong market positions in the UK and Europe, they don't have a bridgehead in the key US market," said Philip Harris, a fund manager at Albert E Sharp and a former Psion shareholder. "We feel Microsoft, with the new Windows CE, will take over the market in the next few years."

While sales of the Windows CE machines - produced by the likes of Compaq, Hewlett-Packard and Philips - so far have fallen short of expectations, their presence has made consumers think twice about buying products running on an different platform.

"While we feel we are very well positioned with our new technology, we are concerned by the state of the market, which has been disrupted by the introduction of the Win CE platform," said Psion chief executive David Potter last week.

The PalmPilot has struck a chord with US consumers. A slimmed-down electronic organiser with a stylus instead of a keyboard, its main attraction is the ease of use of its address book, calendar and to-do list, and a moderate price tag that starts at $249 - about half the least expensive Series 5 model.

"The PalmPilot is an interesting product which has done well in the US, but not in Europe," said Mr Potter. "It's lower priced and offers much lower functionality. You can't input and manipulate your data in the same way as with the Series 5."

While the hand-held computer market has taken off in the past two years, Psion's profit has not. The company yesterday said 1997 net income fell by 25 per cent to pounds 7.7m as the strong pound made exports costlier and the Series 5's success hit sales of the Series 3. Psion's earnings are close to those in 1995, although sales rose 57 per cent.Psion said it was "cautious on the immediate outlook".

Psion shares slumped 32 per cent to 285p last week. "The future looks bleak," said Keith Woolcock, an analyst at Merrill Lynch International.

There are other parallels between Psion and Apple. The pioneer of icon- based computing was squeezed out of the mass market by PCs running on Windows after it declined to license its Macintosh operating system to third parties. Analysts worry that Psion too has missed the opportunity to make its operating system the industry standard.

Psion last year named Philips Electronics as the first licensee of its EPOC32 system, and said it had licensed the system to another "major global" company that had requested non-disclosure. Mr Potter said he considered licensing opportunities in the smart-phone area particularly interesting, but acknowledged that Psion won't get "material" royalty income until 1999.

Analysts have speculated that the second licensee is Ericsson, but the Swedish telecoms equipment maker, which has introduced a hand-held computer running on Windows CE, said it was sticking to the Microsoft platform for now. "We're not planning to use (the Psion system) at the moment," said Jan Ahrenbring, head of information at Ericsson's handset unit.

Mr Harris said Psion was likely to remain market leader in Europe for the next few years. In the long term, however, it will be hard-pressed to fend of the competition, he said. "At the end of the day, the Microsoft juggernaut will roll over them."