How Palm Lost It!

[Dashken]

NEW YORK - When Palm announced today that its new smartphone would run an operating system from Microsoft, it was the equivalent of Coca-Cola agreeing to fill its bottles with Pepsi.

For the better part of a decade, Palm (nasdaq: PALM - news - people ) and Microsoft (nasdaq: MSFT - news - people ) have fought for dominance in the mobile computing market. Palm helped create and singlehandedly popularized the market for handheld computers, and Microsoft, as it has many times, was forced to play catch-up.

"Palm made handhelds mainstream," says Current Analysis analyst Sam Bhavnani. "The Palm Pilot [brand] was used to describe even non-Palm products, like Kleenex or Rollerblades."

As recently as a year ago, the Palm operating system was still on top of the mobile software market. In the second quarter of 2004, 41.8% of all PDAs shipped worldwide were loaded with the Palm OS, compared with 36.6% with Windows, according to Gartner. But by the second quarter of 2005, Palm's lead was eviscerated. PDAs with the Palm OS accounted for just 18.8% of all PDAs, compared with 45.7% for Windows.

Things didn't fare that much better on the hardware side. In the second quarter of 2004, Palm's share of PDAs shipped worldwide was 33.2%, putting it ahead of Hewlett-Packard (nyse: HPQ - news - people ) with 19.3% and Research in Motion (nasdaq: RIMM - news - people ) with 18.6%. But by the same quarter of 2005, Palm's share had fallen by nearly half to 17.8%, compared with RIM's 23.2%, and 12.5% for HP.

What happened? For one thing, Microsoft beat up on Palm the same way it took out many of its competitors in the desktop OS space: by putting pressure on hardware vendors to use its operating system, and offering it at a price they couldn't refuse. "It's typical when a market gets a certain critical mass, that Microsoft comes in and tries to squeeze out the niche players," says Caris & Company analyst Susan Kalla.

With tens of billions in cash, Microsoft can afford to be patient and has shown a willingness to even lose money to gain a foothold in markets it considers strategic. Palm also appears to have misread what the market wanted. The company continued to focus on basic Daytimer-like features in the Palm OS, while multifunction, Internet-connected devices were what customers clamored for.

It probably didn't help that Palm seemed to have a sales conflict. On one hand it sold the PDA itself, and on the other it was attempting to build a software business by licensing its PDA software to companies with which it would essentially compete on the hardware side.

Eventually Palm was forced to spin off its software business into a company called PalmSource (nasdaq: PSRC - news - people ). But revenue at Palm, which even bought Handspring (another struggling PDA maker), still shrank.

Now, by partnering with Microsoft, Palm may have received a new lease on life. The Palm operating system, meanwhile, is likely doomed.

"This is not good news at all for the Palm OS," says Bhavnani, but "adding Windows to the platform is a huge win for Palm. It will vastly increase Palm’s opportunities in the corporate space."

"The PDA market is evolving into a phone market," says Kalla. Handheld computer users want access to their corporate e-mail, applications and databases, she says, and cellular networks provide near-ubiquitous connectivity. And since workers want to connect to their Microsoft e-mail and documents, Microsoft has an advantage selling them mobile software.

"Microsoft owns the desktop, and they have relationships with the key [information technology] people," Kalla says. "They tell them what they want, and then Microsoft has the resources to get it done."

This is also a key reason why Microsoft has decided to put its OS on Palm's Treo smartphone. The device is one of the hottest phones on the market, with almost half a million devices sold last quarter, according to Palm. IT managers have already integrated the gadget into their corporate infrastructure, and since they're already familiar with Microsoft products, managing other Windows devices may be an appealing proposition.

"It looks an awful lot like PCs in 1985," says Scott Horn, general manager of mobility and embedded devices at Microsoft.

Chances are good that future handhelds from Palm will look more like the Treo and less like the unconnected organizers of the past. Odds are also good that they'll run Windows and not the Palm OS.

Still, the win hasn't managed to budge Microsoft stock, which has been stuck in neutral for over a year. It could be that investors are bored with PCs, PDAs and Office talk from Microsoft. What they want to see, and what may finally goose the shares, is some sign that Microsoft is gaining on Google (nasdaq: GOOG - news - people ) in some fashion--any fashion--on the Internet.

Despite its defection to Windows, the folks at Palm say the company is still committed to the Palm OS and will continue to release new devices running both Windows and Palm software. But there's already considerable distance between Palm and its namesake OS. In 2003, Palm spun off its OS division into PalmSource, and earlier this month Japanese software company Access bought the company for $324 million in cash.

But Access' interest might not even have been the Palm OS. By acquiring PalmSource, the company gained Linux development resources for mobile devices in the U.S., France and China, including those from PalmSource's recent acquisition of China MobileSoft, a Linux software firm. It's possible the software firm could discontinue the OS, deciding instead to take the company's technology and engineers in new directions.

And even if the OS does survive, it'll likely be relegated even further into niche markets. "It's likely that since PalmSource was just taken out, one place the Palm OS would go would be low-end phones and PDAs," says Kalla.

Game over. Microsoft wins.

Source: http://www.forbes.com/technology/200..._0926palm.html

[peaz]

oh my.... what an interesting piece of news.. hahahaha. Maybe Linux would take over Palm's place now in the PDA segment.

[Dashken]

More stories...

Palm CEO Ed Colligan spent several days in Cannes in February 2004 talking up the Treo handheld computing device over its Windows-based competitors. But that same week, away from the massive 3GSM trade show, he was secretly meeting with the enemy.

At a nondescript Comfort Inn a short distance from the main conference center, Colligan and several Palm colleagues held a clandestine gathering with a team from Microsoft that was led by mobile unit head Pieter Knook. The groups took separate cabs to the hotel, met for several hours in a conference room, and then returned to the tech confab as though their rendezvous had never happened.

The secret meeting, to discuss business terms of a possible partnership, paved the way for the developers of the Palm operating system to join up with a company that had once been their fiercest rival.

Now Colligan and his Microsoft counterparts have gone public. On Monday, Colligan and Microsoft chairman Bill Gates were on a ballroom stage at the far-tonier Palace Hotel in San Francisco to announce plans for a Windows-based Treo.
Rivals' fortunes tied
The combination seemed unthinkable just a few years ago. Palm envisioned itself as a substantial rival to Redmond, threatening to head off its computing dominance as the power of desktop computing shifted to pocket-size devices. But a series of miscues substantially weakened the company, leaving it little choice but to team up with the world's largest software maker.

Although Palm has pledged to continue using the Palm OS in both handhelds and phones, the company has now significantly tied its fortunes to the rival it once denounced.

In doing so, Palm is making a tough bet. The company is gambling that Microsoft's operating system has advanced far enough to power a decent cell phone, while still having enough rough edges that Palm can carve out a niche by going beyond the standard Windows Mobile software. In doing so, Palm hopes it can avoid the fate of being just another clone cranking out hardware on Microsoft's behalf.

Microsoft, meanwhile, has scored a significant win in its decade-long quest to crack the mobile market. In wooing Palm, Microsoft has brought a one-time rival into its fold and ideally gained a new creative force as it tries to move its PC empire into the burgeoning market for cell phones.

"Palm always did great work, and so we lusted after some of those things that they do well," Gates told reporters at Monday's launch.

The partnership is not totally out of the blue, of course. The two companies offered a glimpse at the detente last year, announcing a pact that allowed Palm OS-based Treos to connect directly with Microsoft's Exchange servers for corporate e-mail and calendar information.

But even as that deal was being announced, Microsoft and Palm were already meeting in secret to plan a much broader alliance. The companies followed their Cannes discussions with a meeting at another trade show in March. During the CTIA cell phone trade show in New Orleans, executives from the two companies met at Arnaud's, a well-known Creole restaurant in the French Quarter.

The two companies had booked a private room for the gathering. However, executives arrived and found their table was not yet ready, so they divided into their separate camps and headed to opposite ends of the 20-foot-long bar, pretending not to notice one another.
Code name Hendrix
Finally seated some time later, executives from the two companies, as they sipped bisque and ate Creole bruschetta, hashed out their marketing plans over a four-hour dinner one described as a "17-course extravaganza." The execs have fond memories of that meal, which sealed their partnership.

Following Hurricane Katrina, "we're wondering if that restaurant is still there," said Palm senior vice president Ken Wirt. (The 87-year old restaurant issued a press release on Monday saying that it is still assessing damage, but plans to reopen "as quickly as possible.")

Even when not trying to hide in the middle of the entire cell phone industry in New Orleans, the two companies went to great lengths to keep their relationship a secret. In phone calls and e-mails they referred to one another only by code names. Microsoft was "Woodstock," Palm was "Purple Haze." The Windows-based Treo itself was called "Hendrix." Anyone who forgot to use the psychedelic pseudonyms was fined.

When attending a meeting at Palm's offices in Silicon Valley, Microsoft workers were reluctant to offer up their affiliation to a security guard who was printing visitors' badges. After failing to convince the guard, the delegation spent an awkward few minutes in the lobby, with their hands across their chests to cover up the labels that indicated their company affiliation.

"We were frankly scared out of our mind about leaks," said Scott Horn, a senior director in Microsoft's mobile and embedded device unit.

Palm officials tried to do the same when they visited Redmond, opting for generic bags over the standard corporate issue gear. However, several failed to remove the bright orange luggage tags emblazoned with the company's new Palm logo.

"Clearly none of us are going to be spies," joked Page Murray, Palm's vice president of marketing.

In its secret meetings, Palm execs managed to convince their Microsoft counterparts to build several software hooks they needed into the latest version of Windows Mobile. The changes allowed Palm to add some handy features into the Windows version of the Treo. One new trick allows Treo owners to ignore an incoming cell call, instead sending a brief text message to the caller. A second feature allows Treo owners to navigate multiple voice-mail accounts using VCR-like buttons, rather than having to know that "5" is the key for fast forward or remember that "7" saves voice mail at work, but deletes it at home.

A key question, though, is whether Microsoft will give Palm enough room to innovate in the future, now that it successfully wooed the device maker. By going with Microsoft, Palm is letting go of one of the key differentiators between its products and those from better-known competitors.

Colligan said he understands the risk and only undertook it with assurances that Palm would be able to build enough software on top of the OS to make his products stand out.

"It was the only way we felt it could work for us," he said at the Monday press conference.

Executives from both companies suggest that the Palm-Microsoft relationship, forged at those meetings in Cannes and New Orleans, will continue to be close. But it remains to be seen whether Palm will retain its individuality now that it has the Microsoft imprimatur.

Wirt acknowledges that there are no formal procedures in place that ensure that Palm will get the things it asks for the next time, or the time after that. "It's functioned more as a relationship type thing."

Colligan said Palm could try to patent particularly strong advances, but in general he said the company believes the best way to stay ahead is to keep cranking out new products.

"We have ideas about many things that we didn't get to do in this version," he assured reporters.

But for all its ideas, Palm is still a relatively small company. And given that it has pledged continued support for the Palm OS, it must now divide its limited engineering resources between two incompatible efforts.

Colligan acknowledged that the challenges of developing for two entirely different operating systems are enough to keep his firm hopping. He emphatically shook his head back and forth when asked if Symbian and Linux-based Treos might be next.

"We don't need another operating system," he said, adding later, "It's too much effort."

Source: http://news.zdnet.com/2100-1040_22-5883320.html

[Adrian Wong]

Hmm.. Palm's downfall kind of resembles 3dfx's downfall, doesn't it?...