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It's Not Easy Being Palm

With last week's release of the Treo 680 offered by Cingular Wireless , Palm enters a new era of reaching out to consumers with a lower-priced smartphone that offers many of the features and functionality of the more expensive Treo 650 and its predecessors, in a sleeker, more user-friendly package.

The 680, however, faces some problems -- including its basis in a Palm operating system that faces a cloudy future. And Palm finds itself in a precarious position, its future growth hemmed, on the one side, by the continued dominance of BlackBerry (which in September released a consumer-oriented, lower-priced version of the BlackBerry, the Pearl), and on the other by the rise of Microsoft Corp. (Nasdaq: MSFT)'s free mobile email service. (See A Treo Your Mom Could Love.)

This month's acquisition of mobile-messaging software company Good Technology Inc. by Motorola Inc. (NYSE: MOT) only raises the level of doubt surrounding the viability of Palm as an independent hardware vendor. Palm CEO Ed Colligan is spending more and more of his time these days asserting that his company is not for sale; but the buzzards are circling, and many industry analysts believe that it's a question of when, not if, the Sunnyvale, Calif.-based company will be sold. (See Motorola Gets Good.)

"There is no doubt that Palm is a company whose best days are behind it," says Carmi Levy, senior research analyst with Info-Tech Research Group , "as it struggles to maintain a foothold in a rapidly expanding smartphone market."

The market seems to agree: Adjusted for a March 15 2-for-1 split, Palm's share price is essentially flat on the year, and it has actually dropped more than 3 percent since the Treo 680 announcement.

There is no way to predict with certainty what path Colligan and Palm's board will choose. But with the help of Levy and other analysts, Unstrung has assembled a list of possible scenarios. Four are acquisitions by other companies, and one is a sharp strategic turn.

  • Acquisition by RIM: Despite the fact that RIM and Palm continue to be, as of this writing, entrenched rivals, this is arguably the most likely scenario. With a market cap of $26.5 billion, RIM is well positioned for a major acquisition, and eliminating its major competitor in terms of brand recognition would solidify its position at the top of the increasingly competitive mobile-messaging heap.

  • Acquisition by Motorola: The Good Technology purchase would seem to rule out Motorola as a Palm suitor, but that's not necessarily so, says Levy.

    "Motorola's efforts to launch a broadly accepted smartphone have met with only lukewarm success so far," he adds. "Palm has a fairly strong connection with its end-user community that Motorola would do well to leverage into future product development efforts."

    It's also worth noting that Motorola has been down this path before: It was outbid by Access Co. Ltd. for the PalmSource operating system unit in 2005. Following on the purcase of Symbol and of Good, obtaining Palm itself would be a logical next step in Motorola's efforts to crack the enterprise smartphone market.

  • Acquisition by Nokia: Like Motorola, Nokia Corp. (NYSE: NOK) obtained a maker of mobile-messaging systems when it acquired Intellisync last year. But despite the success of its E-series devices, the world's No. 1 maker of handsets is still looking for a home run in the lucrative smartphone market. (See Nokia's Slim Sync.)

  • Acquisition by Sony Ericsson: The joint venture between the consumer-electronics giant and the world's No. 1 vendor of wireless infrastructure equipment recently announced that it will acquire UIQ Technology, which makes the interface for Sony Ericsson Mobile Communications smartphones. But UIQ is a subsidiary of Symbian Ltd. , whose mobile OS -- despite its strong technological features and its dominance of the European market -- has never made notable inroads in North America.

    "Some things just don't manage to make the leap across the pond," observes Levy, "and until Sony Ericsson figures out that its smartphone strategy in North America is doomed until it gets serious about the OS, it will continue to lag the high-end smartphone market."

Other possible, though unlikely, acquirers include Japan's Access Co. Ltd. , which owns the Palm OS and may be looking to become a device player itself, and Apple Inc. (Nasdaq: AAPL), which has long been rumored to be developing an "iPhone" device of its own. The more radical step for Palm, though, would be to ditch its current OS and embrace fully open standards for mobile email.

That's the path advocated by Fabrizio Capobianco, who is a biased observer, since he's the CEO of open-standards mobile-email provider Funambol Inc. But it would mark a dramatic leap for Palm, once seen as a technology leader, but now the seller of devices that have no server component (unlike RIM), no in-house push email program, and that lack the capacity for multimedia over-the-air synching with desktops and laptops.

Going with Mobile Linux, argues Capobianco in a recent blog post, would enable Palm to cut its ties to Good and to Microsoft, to solve its OS issues, and to go after the consumer market in a new and effective way. The alternative is continued stagnation and eventually acquisition.

"Stay the course, support Microsoft and other proprietary approaches," says Capobianco, "and you'll be another Symbol, bought by a silo."

— Richard Martin, Senior Editor, Unstrung

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