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Palm Platform in Doubt

Light Reading
LR Mobile News Analysis
Light Reading
7/31/2006

Even as it rolls out popular new versions of its Treo smartphone, looking to eat into the BlackBerry's dominant share of the enterprise mobile messaging market, Palm Inc. has run into what could be a crippling impasse with PalmSource, the maker of the long-in the-tooth Palm operating system.

In its annual report, released on Friday, Palm revealed that PalmSource Inc. (Nasdaq: PSRC) -- now owned by Japanese software maker Access Co. Ltd. -- has failed to meet certain obligatory "development milestones," and that Palm will cease making the agreed-upon royalty payments to PalmSource as of December of this year.

"Our license of the Palm OS from PalmSource is critical to the operation of many of our products," the report says. "We rely on PalmSource to provide the operating system for all of our handheld and a significant portion of our smartphone products."

Noting that the two companies are currently in negotiations "to expand [Palm's] development and distribution rights to the current version of the Palm OS" the report goes on to acknowledge that, "If we are unable to successfully conclude these negotiations, it may adversely affect our ability to develop and distribute new products based on a next-generation version of the Palm OS."

The OS-related turbulence comes at a critical time for Palm, which has not introduced a new version of its current OS, nicknamed "Garnet," in almost four years -- a lifetime in the rapidly changing smartphone market.

Symbian dominates the OS market for all handhelds, while Microsoft has continued to refine and expand its Windows Mobile OS to try to capture a wider share of the enterprise mobile-email market. At the same time, RIM has been seeking new, broader markets for the BlackBerry system.

Close observers are divided over how large a stumbling block the dispute with PalmSource will be for Palm, with characterizations ranging from "temporary hiccup" to "crippling and potentially fatal blow." There has long been speculation that Palm would develop its own update to Garnet, perhaps based on Linux; but it's clear that the handset maker now faces significant questions about its ability to offer a new, full-featured platform to keep pace with rivals RIM, Symbian, and Microsoft.

"The now-ancient Palm OS 5 suffers from a paucity of enterprise-friendly features, such as robust security, VPN capability and, most notably, an inability to multitask," says Carmi Levy, senior research analyst at Info-Tech Research Group . "It should have been put out to pasture long ago, but Palm has dropped the ball enough times in the interim that most enterprises can’t be blamed for looking elsewhere. It’s impossible to plan a mobile roadmap when the vendor lacks a roadmap of its own."

Palm says it will continue to release new products based on the current version of the operating system.

Meanwhile, the friction between Palm and its OS-developer also raises intriguing questions about the plans of Access, the Japanese software company that last year acquired PalmSource.

Access CTO and co-founder Tomihisa Kamada has said publicly that the company plans to increase its share of the overall mobile operating system market to 30 percent by 2010 -- an ambitious scheme that could mean it is unwilling to focus exclusively on new versions of the Palm OS.

"Mobile phones are becoming very complicated devices, and in order to meet customers' requirements total integrated solutions are becoming very important," Kamada told the International Herald Tribune recently, noting that Access plans to integrate the Palm OS with its mobile browser NetFront, which has been quite successful in Japan. "Acquiring PalmSource allows us to do this and also allows us to cover all the important markets: the U.S., Europe, Japan, and China. Integration costs for the handset makers are heavy, so if they can go to a one-stop shop they are happy to work with one company."

— Richard Martin, Senior Editor, Unstrung

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