Column: Palm sues for peace

by Mathew on September 27, 2005

Here’s a column I posted at globeandmail.com about Palm’s deal with Microsoft:

“Chalk another one up for Microsoft. With Monday’s widely-expected announcement involving handheld-maker Palm Inc., the software colossus has added to the long list of victories it has won over lesser mortals — a list that includes Netscape Communications, which also pioneered a market only to see it eventually taken over by Microsoft. For Palm, agreeing to use Windows Pocket PC as the operating system on its devices is like Ford agreeing to put General Motors engines in its trucks, and many Palm devotees clearly see it as dancing with the devil. The company may have saved part of its business (although even that is open to debate) but it has likely lost its soul. The next target in Microsoft’s sights, of course, is Canada’s Research in Motion.

Rumours about a deal between Palm and Microsoft have been flying for the past few months, and according to several reports — including one from a programmer who works at the software giant — the two companies have been working on blending their products for 18 months. In other words, even as a survey last year was showing Palm as the leader in the handheld industry, with 33 per cent of all PDAs shipped in the second quarter of 2004, the company was already in discussions with Microsoft about using its software. Why? Because the PDA company had already seen the writing on the wall, and it spelled out three words: “shrinking market share.” By the second quarter of this year, Palm had just 18 per cent of the market for handhelds.

Of course, those numbers were a little distorted by the fact that the survey company (Gartner Group), left out Palm’s most successful product, the Treo, because it was defined as a smart-phone and not a PDA — another example of how the lines between products are blurring. And in many ways, the Treo was the driving force behind the Microsoft/ Palm deal: the software company, which has been trying to break into the handheld and smart-phone business, wanted to piggy-back on the Treo’s popularity. Palm, meanwhile, has confessed that its operating system simply hasn’t been able to keep up with the new features users seem to want.

The company known as Palm has had a long and tangled history, one that saw its founders sell the company, then try to spin it off, then quit to start a competitor, then merge that competitor with Palm again, and finally split the company in two again (a different way) — and all that in just a little over a decade. Jeff Hawkins, who helped develop the GRiDPad, one of the first pen-based computers, launched Palm in 1992 and shortly afterward joined up with former Apple executive Donna Dubinsky and salesman Ed Colligan. Their first product was the Casio Zoomer, which came out in 1993 just two months after the Apple Newton.

Other companies came out with handhelds too, including Sharp, GO, Hewlett-Packard and Toshiba, but none of them seemed to capture the popular imagination — until Palm launched the original PalmPilot, backed by modem maker U.S. Robotics. The company, which was eventually bought outright by U.S. Robotics, hoped to sell about a hundred thousand of the devices its first year; instead, it sold about three times that many, and in the first 18 months had sold more than 1.5 million units. By the middle of 1999 the company had sold more than 4 million.

Even as it was becoming the leader in the industry, however, Palm was going through turmoil. After parent U.S. Robotics was sold to 3Com, Mr. Hawkins and Ms. Dubinsky proposed spinning Palm off as a separate company, but 3Com refused. So the two left to start Handspring, whose Palm-like products were more colourful and had more features. Then 3Com did a 180 and spun off Palm as a separate company. The next few years were not kind to the handheld maker, however, as competitors such as Handspring took the lead in terms of applications and features.

Palm bought Handspring in 2003, in part because of the company’s popular Treo PDA-phone. Even as sales of the Treo accelerated, however, the traditional PDA business continued to deteriorate. As more phones offered PDA-style functions, the market for a handheld with just calendar and contact features kept shrinking. And while device makers were adding multimedia features, Palm couldn’t because its operating system couldn’t support them — or not without a lot of effort. That helped lead to the spin-off of PalmSource, the software side of the company, which was bought earlier this year by Access Software of Japan.

Enter Microsoft, which has been trying to win a piece of the market for almost a decade. Its Pocket PC software has built-in multimedia features and a legion of developers, as well as established corporate relationships developed through its Exchange e-mail server business. Theoretically, that could help Palm penetrate the corporate market, something it was never able to do before. And together, the two might be able to make a dent in the market lead held by Research in Motion, which has also been trying to evolve to suit the needs of the smart-phone market.

Is it better to sign a deal with the devil and stay alive, or suffer through a slow, lingering death? It’s clear which side Palm came down on. Now all it has to do is show its long-time fans that the decision was worth it.”

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