Palm Today, Gone Tomorrow

Palm lovers, get out your hankies. Thisstory is a real tearjerker.

The company that single-handedly createdthe personal digital assistant with the Pilot 1000in 1996 is at a crossroads. Down one path liesWindows. Down the other path: stagnation,decay, and perhaps death.

If you buy a Treo next year, there’s a goodchance that it will be based on the WindowsMobile operating system, not the venerable PalmOS that has powered all prior Treos and PDAs.At press time, Palm had made no announcementabout a Windows-powered Treo, and Palmrefused to comment for this story. But all signspoint to an imminent platform switch.

FOCUSED ON PHONES
Let’s get one thing cleared up right away: Palm’sdays as a leading vendor of PDAs are over. Infact, the company’s share of the worldwide PDAmarket has been steadily shrinking from its highof 68 percent in May 1999; it currently stands atabout 18 percent, according to Gartner.

What’s more, the PDA market is increasinglyirrelevant. Today’s phones are more capable andcan hold more data than 20th-century phonescould. Why carry two devices when one will do?Palm has seen the writingon the wall. “There’s noquestion that the traditionalPDA business has declined,”Palm CEO Ed Colligan saidin a June teleconference.Accordingly, the companyis putting its most intenseefforts into the smart-phonebusiness.

“Ever since Palm acquiredHandspring, it has reallyfocused its resources onbecoming a stronger playerin the smart-phone market,”says Todd Kort, a principalanalyst for Gartner.

PALM TUCKERED OUT
While its PDA market founders, Palm’s smart-phone businesshas taken off. The Treo has been a tremendous success, drivingPalm to a whopping 50 percent of the U.S. smart-phone market(though it holds only 5 percent of the market worldwide)and helping propel the company through two solid years ofunbroken revenue growth. In retrospect, it’s lucky that Palmbought Handspring, the developer of the Treo, in 2003.

Unfortunately, the underlying operating system isn’t doing sowell. Palm OS 5.4 is a dead-end street. It has poor support formultimedia features and lacks multitasking capabilities.Windows Mobile, by contrast, has been multitasking foryears. It’s also got a built-in web browser, extensive support foraudio and video, and corporate-friendly security features.

Palm OS developer PalmSource (which was acquiredby Japanese software developer Access in September)attempted to bridge the features gap last year with a brandnewoperating system, Cobalt, which was multimedia- andmultitasking-friendly. But the OS was a fl op, requiring toomuch memory and processing power to be practical, and nocompanies ever released a Cobalt-based device.

Implicitly acknowledging the failure of Cobalt, PalmSourcehas stated its plans to switch to a Linux-based architecture. Buta commercial version of the new Linux OS won’t be availableuntil late 2006, with devices based on it unlikely to be readyfor sale before 2007. Palm can’t afford to wait that long.

END GAME
M:Metrics senior analyst Seamus McAteer predicts that Palmwill announce a Windows-based Treo by January 2006.Over the long run, that will spell the end of Palm OS-basedTreos. “Who wants a Palm-based Treo when the company hasannounced that it’s migrating?” says McAteer.
Without a major upgrade to Windows, the company maywell be dead in the water, increasingly unable to compete withsmart phones that offer more whizbang features.
But it’s a risky move. Many of Palm’s customers have stuckwith the company simply because it’s not Microsoft. “Goingover to a Microsoft operating system will not win the companyany friends among its current customers,” says Gartner’s Kort.And with Palm accounting for 60 percent of PalmSource’srevenue, losing even a fraction of that business would be aserious blow for PalmSource.

Still, Palm’s executives aren’t likely to spend a lot of timeworrying about the fate of their sister company. Palm has towalk a delicate line between a dying operating system and apack of anti-Microsoft zealots. Whatever decision they make,they’re likely to piss off somebody. -Dylan Tweney

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Palm Today, Gone Tomorrow