Microsoft (MSFT) - Get Report baked itself a cake with a million candles.

On Tuesday, the software giant celebrated 1 million Pocket PC-based handhelds sold -- with a select group of friends -- just before the close of its first year of sales.



popular iPaq device got the biggest piece of cake, while the



Jornada and the


Cassiopeia fought over who'd take the first whack at the




Pocket PC is the renamed, rejuvenated Microsoft Windows CE platform, the most credible threat to the long-term health of the Palm operating system besides Palm's internal fumblings. Microsoft and its partners know the enterprise inside and out, making Pocket PC-based devices a roadblock for Palm's most promising and relatively untapped market: corporate accounts.

There is, however, the little issue of Palm being better. And selling more.

Palm's operating system still dominates the handheld industry. While Microsoft touts 1 million Pocket PC devices sold in just under a year's time, in the month of March alone, 278,000 Palm OS-based devices were rung up through U.S. retail-sales channels.

"Historically, almost one in 10 handheld devices is a Pocket PC. Its share is usually below 10%," says

NPD Group

senior analyst Steve Koenig. "The Pocket PC universe vs. the Palm universe parallels Apple vs. the PC."

In March, according to NPD, 84.7% of handhelds sold in the U.S. shipped with the Palm OS, while 6.1% featured Pocket PC.

Palm's operating system is slim and sleek, several popularity levels away from the insular Pocket PC geek and its personal computer leanings. Nonetheless,


estimates that in three years, the Pocket PC will capture 40% of the market.


analyst Charlie Wolf says Pocket PC's strength is its connected partners. He thinks neither Palm nor



will be able to compete with Microsoft's partners when it comes to enterprise-geared sales channels. He speculates that Pocket PC will make a run at Palm in the near future.

Others aren't so sure.

ABN Amro

analyst Rob Cihra argues that the Pocket PC operating system is too clumsy to unseat Palm in the enterprise in all but the staunchest Windows-loving accounts. He is unfazed by Palm's recent abandoned acquisition of enterprise-application player

Extended Systems



"We look at the enterprise as Palm's single-greatest and most untapped opportunity over the next several years," Cihra says. "Palm is the go-to choice. All other vendors have to prove why they should be in there instead of Palm. Although Palm's not buying Extended Systems, the enterprise is still its greatest opportunity. Backing away from the deal doesn't mean it's backing away from the market."

Additionally, Cihra pegs the majority of the Pocket PC success on Compaq's iPaq efforts, without which there would be little Pocket PC activity. Compaq is the biggest Pocket PC player. "The mistake is to just assume Pocket PC is going to be extremely popular in the enterprise," says Cihra, who points to



(IBM) - Get Report

Palm devices and adds that


(DELL) - Get Report

sells Palm products.

As always, Microsoft remains a nagging concern, a dark horse in a handheld market that has been dominated to date by consumer sales, not the software empire's strongest suit. It's best to keep Microsoft in your peripheral vision; it has a funny habit of sneaking up on markets.