.FLYINGHEAD FROM THE EDITOR-IN-CHIEF
.TITLE The continuing mystery that is Palm, Inc.
.AUTHOR David Gewirtz
.FEATURE
.SUMMARY So, Palm is going to produce what is essentially a Pocket PC phone. Palm also sold off the Palm OS, which was its primary differentiating factor. Does that mean the Palm OS is dead? Should you stop buying Palm PDAs? Should you stop developing software for the Palm OS? Read Editor-in-Chief David Gewirtz’ analysis to learn what we think.
I’ve been putting off writing this article for a number of days now, because I just didn’t have the heart to dig once again into the Palm saga. But weird changes are happening at Palm, Inc. and part of my job is look impartially at the company and tell you what I think.
The best way to start is a quick recap of what’s been happening. On September 9, PalmSource (the company that makes the Palm OS) was acquired by Japanese mobile phone software vendor Access. Then, on Monday, Palm announced that it’ll be making a Windows Mobile version of the Treo smartphone.
.CALLOUT Does that mean the Palm OS is dead? Should you stop buying Palm PDAs? Should you stop developing software for the Palm OS?
This would be like Apple selling off the Mac OS to Bandai and then announcing that it’s making Windows machines. It’s not only big news effecting a whole lot of companies, it’s also somewhat baffling because it appears Palm’s just dumped the one thing that differentiates it from the competition, the thing that makes Palm uniquely Palm.
.BREAK_EMAIL What’s it all mean? Read our analysis by tapping here.
Palm’s a very interesting business and will no-doubt wind up a fascinating B-school case study. While the company has always made devices that are instantly identifiable as Palm handhelds, the company’s identity and product names have gone through more nips and tucks than Joan Rivers’ face.
In 1998, Palm’s founders left to start their own company, Handspring. Due to some interesting behind-the-scenes machinations, Handspring was able to license the Palm OS from Palm and, as a result, became a direct competitor, also offering Palm OS handhelds.
In 2003, as both Palm and Handspring were suffering in the PDA sales drop of the period, Palm acquired Handspring, reacquiring its original founders, and folding the now-successful Treo smartphone line back into the Palm, Inc. product line. What’s always been very interesting about that acquisition is the double-play that took place at the same time.
In June 2003, Palm not only announced the acquisition of Handspring; in the very same press release, it announced the spin-off of PalmSource as a separate OS company. The two actions were linked together, as you can see in this press release title: "Palm Announces Acquisition of Handspring to Bolster Industry Leadership; Board Approves PalmSource Spin-off".
This is where things start to get funky to me. Although I’ve spoken to many Palm executives about it, I’ve never gotten a direct answer that makes sense. Here are the elements:
.BEGIN_LIST
.BULLET Palm acquires Handspring and Ed Colligan, one of the original core founders of Palm, who then became Handspring’s CEO, is now Palm’s CEO.
.END_LIST
.BEGIN_LIST
.BULLET PalmSource, which was originally a division doing the OS work, is now to be a separate company that produces the OS and licenses it back to Palm.
.END_LIST
.BEGIN_LIST
.BULLET For some reason, PalmSource and Palm share the Palm trademark through an entity called the Palm Trademark Holding Company. PalmSource (the smaller spin-off OS company) holds 55% ownership of the Palm trademark.
.END_LIST
.BEGIN_LIST
.BULLET When all this happens back in 2003, Palm changes it’s name to palmOne, ostensibly to show that it’s combining Handspring and Palm, but also because we’ll later learn it no longer has the right to use the name Palm as a company name.
.END_LIST
Why did the OS spin-off occur as a connected element to the acquisition of Handspring? If you’re a large company spinning off a subsidiary, why would you give that small subsidiary 55% ownership of your primary trademark? Why wouldn’t you just license them the right to use it? Why was Palm, Inc. forced to change its name, yet again, to palmOne? Why couldn’t PalmSource come up with a different name (especially since PalmSource was also the name for the Palm developer tradeshow)?
It’s all very strange.
Let’s jump forward to May 2005. In May, palmOne announced that it had acquired (or re-acquired?) full rights to the Palm name. According to press accounts, palmOne agreed to pay PalmSource $30 million for PalmSource’s 55% share of the Palm Trademark Holding Company, to be paid in installments over 3.5 years. Since then, Palm changed its name back to Palm from palmOne. My understanding is that Palm (then palmOne) granted PalmSource rights to use certain aspects of the Palm trademarks for a four-year transition period. Which, by the way, means it’s likely that the Palm OS will cease being called the Palm OS sometime in 2009.
.CALLOUT You’d have to be stoned to miss the implications of what’s been going on.
Why did this all have to happen to begin with? It’s as if you bought a house, transfered its ownership to your 13 year old kid, and two years later, bought the garage back from your kid. It’s just not normal. In the housing world, the only reason you’d do that is if you were trying to hide something, get out of something, or you were just plain full-goose-bozo.
Also in May, PalmSource’s CEO David Nagel suddenly resigned with no reason given. Nagel was picked to run PalmSource from the beginning of the spin-out, but suddenly he’s out. Is it a coincidence that this happened at the exact same time the trademark was bought back by Palm?
Tracking the rumor and intrigue surrounding PalmSource is a hobby all its own. In a March 2003 interview with Tony Perkins, Nobuyuki Idei, Chairman and CEO of Sony Corporation stated he wanted to buy the Palm OS. Specifically, he told Perkins:
.QUOTE I really want to own either Symbian or Palm — I want to buy them. Three years ago the Palm was so simple, but it is getting better and better. My problem now is that as Palm licensee we have to pay them lots of money. Palm is like Apple — we don’t know if they are a software company or a hardware company.
Perkins then asked, "You would buy Palm’s software business?" To which Idei replied, "Yes, if they want to sell."
You’ll recall that Sony had a popular line of Palm OS-based products called CLIE. In March 2003, Sony’s top guy says he wants to buy out the Palm OS. In June 2004, Sony completely dumps all Palm OS products. And then in September 2005, PalmSource is sold for $324.3 million to a Japanese software maker, an amount we can all agree would be chump change to Sony.
$324.3 million is the equivalent of about one quarter’s gross revenues for Palm, Inc. Certainly, for a company much smaller than Sony, that’s a lot of money. But if it represents your crown jewels, your prime differentiator, and that with which you’re completely identified, there’d have to be a way to make it happen. And yet, in a September 20th BusinessWeek article, Palm CEO Ed Colligan is quoted as saying in a letter to Palm employees, "There was a point beyond which we didn’t think it made sense."
Going back to our earlier analogy, it’s as if you sold your house to your 13 year old, but didn’t leave any provision in the deal to get it back. Why would you do such a thing?
We at ZATZ have a long and interesting relationship with Palm. We were one of three companies that were able to license the use of the "Palm" trademark, creating our PalmPower Magazine, which became Computing Unplugged when we wanted to expand our coverage beyond Palm. We did that deal directly with Colligan. We also published PalmPower’s Enterprise Edition at the request and with the funding of Palm. So we’ve had some pretty solid friends inside the company.
We also always sign and honor non-disclosure agreements. A non-disclosure agreement is a document that basically says we agree not to spill the beans on a product until a given date. We only sign these NDAs with a few firms (Palm being one), and we never, ever break them. That’s why you might hear rumors or leaks on other Web sites, but you won’t read about them here until and unless the news is independently covered and verified.
Because we’re so careful about honoring NDAs, we usually get some very solid inside information on products and news from Palm. Usually. Even with our connections into the company, we’ve never really been able to get a good, solid read on why PalmSource seemed to have such a hook into Palm.
And that brings us to Monday’s announcement that Palm’s now going to produce a Windows Mobile-based Treo. Although news about this was covered in-depth in the September 20 BusinessWeek, when, under NDA, we asked members of Palm’s management team about it last Wednesday (the day after the BusinessWeek article broke), the deal with Microsoft was categorically denied.
You may have seen pictures and coverage of the new Windows Mobile Treos in another publication. We are told by Palm’s own marketing folks that these pictures were leaked without Palm’s permission. Once, many years ago, we were granted the special permission by Palm to release news of the Palm III before other press outlets. So we can’t fully be sure if the leaked pictures were accidental, or part of a careful campaign by Palm to build up the buzz.
So, Palm is going to produce what is essentially a Pocket PC phone. Palm also sold off that which is its primary differentiating factor: the Palm OS. Does that mean the Palm OS is dead? Should you stop buying Palm PDAs? Should you stop developing software for the Palm OS? Let’s look at these questions from the perspective of the user, the developer, and the investor.
.H1 If you’re a Palm OS user
If you’re a Palm OS user and you like the Palm OS, there’s no reason for you to jump ship now. A quick search on the rumor sites will show some indication that there may be new, aggressively priced Palm OS-based handhelds coming from Palm sometime soon.
With some limited exceptions (the class-action lawsuit against Palm for the Treo bugs being one), Palm handhelds are fine devices. They’re generally nicely priced, have some of the best screens on the market, and most often work long after you start lusting for the newer models.
Without a doubt, if you like the Palm OS and you see a device you want to buy, go ahead and buy it. At least for the next year or so.
.H1 If you’re a Palm OS developer
You, bucko, have got some serious thinkin’ to do.
If you’re a Palm OS developer, you’re one of 400,000 such mobile application developers. This is a huge community of development talent and one of the biggest single reasons we expect Palm will continue to produce Palm OS devices. For the record, we’ve been explicitly assured by Palm management that the Windows Mobile device is a market expansion, not an abandonment of the Palm OS.
That said, you’d have to be stoned to miss the implications of what’s been going on. There are some 39 million Palm OS-based handhelds out in the world, with more selling every day. There’s nothing that specifically indicates that you’ll lose your shirt if you keep developing Palm OS software. In fact, it’s likely you’ll keep making money doing so.
On the other hand, if I were a Palm OS developer, I’d certainly invest some percentage of my time into learning Windows Mobile technologies and either see about cross-porting my applications to Windows Mobile or at least diversifying my product line.
.H1 If you’re an investor
Back in September of 2002, I wrote about Palm’s financial problems. At that time, the company was at risk of being de-listed from the stock exchange, their products were problematic, and things didn’t look so good for our friends at Palm.
Today, their revenue has grown and, in the fiscal year ending in May 2005, their net income was positive for the first time in years. Even in previous years, when net income was underwater, it was getting better each year.
So, while I have a lot of questions about Palm and I sometimes wonder just what drugs they’re making out there in California, I also have to give the company kudos for doing the one thing it’s absolutely responsible for doing: creating shareholder value.
While the company has definitely had its ups and downs in terms of share price and in terms of market valuation, it has, in general, improved itself considerably from what was a very bad financial place to be in. Fixing a company in the financial doghouse is a huge challenge and Palm’s management appears to have pulled it off.
And yet, the company appears to have lost its primary differentiating factor. On the one hand, it’s adding a new market to its offerings. On the other, it’s also a very small fish in what’s now a much, much bigger pond. Can Palm differentiate itself against other Pocket PC makers?
Had PalmSource still been involved, I would have given an unqualified "Yes". PalmSource’s HotSync technology is orders of magnitude less annoying and less problematic than Microsoft’s ActiveSync, for example. But Palm just lost much of its software brain-trust. Without PalmSource’s developers, can it make the Pocket PC less annoying than it is?
Personally, I’d like to see a far more clearly articulated strategy from Palm. I’d like to see a specific plan for how it’s going to court and keep a developer community that’s currently in a basic needs survival panic. I’d like to see a specific plan for where it’s going with Palm OS-based devices and where its going with Windows Mobile devices. I’d like to see a specific plan that explains how supporting two mobile operating systems is good for its long-term business strategy. And, well, I’d like to see a long-term strategy that makes sense.
And, if I were an investor, I’d really like the only surprises to be how cool the new products are.
.BEGIN_SIDEBAR
.H1 Product availability and resources
For more information on the PalmSource acquisition, visit http://www.palmsource.com/press/2005/090905_access.html.
To read the BusinessWeek article, visit http://www.businessweek.com/technology/content/sep2005/tc20050920_6583_tc081.htm
To read the very interesting Sony interview, visit http://www.alwayson-network.com/printpage.php?id=246_0_2_0.
To read "The morbid fascination that is Palm, Inc.", visit http://www.palmpower.com/issues/issue200209/ppeditorial0902001.html
.END_SIDEBAR
.BIO
