A battle for dominance in the embedded operating system world is gaining steam, pitting Wind River on one side and Microsoft on the other.

Until now, these two companies have existed largely in separate worlds. But as a number of end markets continue to converge and Wind River has repositioned its business away from a heavy telecommunications focus, both are now facing off in the same customer spaces.

That may help explain why Wind River completely revamped its product line last week, in what the company described as the biggest technology release in the history of the company. It added support for Linux, which has been particularly popular in places like China and developing countries, as well as a slew of new tools and services. And it began pushing its middleware capabilities for connecting to other platforms so that customers don’t have to do all the integration work.

“Our customers want to do less integration and more innovation,” said John Bruggeman, Wind River’s chief marketing officer. “We have a fully integrated networking stack, a security layer, Web service and SNMP [simple network management protocol] at the management layer.”

Bruggeman said Wind River is providing additional middleware for the telecommunications and networking equipment, as well as the consumer and industrial markets.

But until now, the primary markets that Wind River targeted -- it was the dominant player in the communications space until the market tanked three years ago, and continues to be the dominant player in the military and aerospace world -- have been separate from the world Microsoft has targeted with Windows CE and XP Embedded. With convergence of communications across multiple markets and the consumer market subsuming multiple markets that previously belonged to the corporate world, that overlap is growing.

“Microsoft will be the primary competitor for market share in the device world,” said Bruggeman. “We are starting to see a bifurcation of the device space. Microsoft is in the low-margin, high-volume world, which is not a segment that we serve. We serve the cockpit of an airplane, the multifunction printer, camera, DVR and network switch.”

Microsoft, however, has its sights set substantially higher than that. The company is reaching well beyond its previously defined broad markets. John Starkweather, product manager for Microsoft’s mobile and embedded devices division, said his company is just beginning to achieve critical mass in a variety of new areas after building deep relationships across the semiconductor industry.

“We’ve spent many years building an ecosystem of partners,” said Starkweather. “We’ve got more than 2,500 partners now involved in device building, and we’re beginning to see critical mass between both Windows CE and XP Embedded.”

Starkweather said that will become especially clear once the voice-over-IP market begins taking root. He said the growth in set-top boxes also has contributed greatly to the division’s 30 percent-plus annual growth, which is the fastest-growing group within Microsoft. But perhaps even more important, he said, is that with communications becoming an essential part of all devices, Microsoft is extremely well-positioned to take advantage of system-level design because of its presence in other markets.

At stake for both companies is an unknown but potentially huge market. Starkweather says the real opportunity is the world of proprietary operating systems, which Microsoft estimates represents 85 percent of the operating system market. With the growth in systems on a chip, he says more and more of that work will be outsourced to companies like Microsoft.

The market for merchant embedded operating systems -- not including the proprietary portion -- was $760 million in 2003, according to Venture Development Corp. Of that, Microsoft and Wind River together owned just less than 50 percent of the market, with Microsoft several points ahead of Wind River in market share.

Steve Balacco, an analyst at Venture Development, said that in the past the two played in different sandboxes. But he said there is a growing overlap in both consumer electronics and industrial automation. And that, by all accounts, bears watching.