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Competition dims outlook for Palm

Palm Inc's operating systems run more than three-quarters of the world's handheld computers, but the company no longer looks very likely to become the Microsoft Corp of the industry.

Perhaps such hopes were the reason the stock market valued the company at US$53 billion -- more than General Motors Corp and Ford Motor Co combined are worth today -- when it was spun off from 3Com Corp two and a half years ago.

However, intense competition, some of it from Microsoft, and the slump in demand for technology products have reduced Palm to a penny stock, though one still worth more than US$400 million because so many shares have been issued.

At least part of the blame lies with the company's previous strategy and execution, analysts say.

In particular, Palm decided to make both hardware and software, but at the same time let other hardware manufacturers such as Sony Corp license its software for their devices.

The downside is that those licensees can often outdo Palm in making popular consumer electronics. "In many ways, Sony led many more innovations" by introducing add-on devices on Palm platforms, says analyst Michael Gartenberg at Jupiter Research. "That was pretty embarrassing for Palm."

The other problem with the strategy is that it limits Palm's software business because potential licensees -- for fear of having to compete with Palm's hardware after signing up for its software -- may instead go for Palm's operating-system competitors such as Microsoft Pocket PC.

Microsoft has been diligently eating into Palm's market share, although Palm remains market leader for now. "It will be a battle over the next 18 months for the hearts and minds of business users, enterprise consumers and consumers," Gartenberg predicts.

Palm is trying to regain leadership of the market. Late last year, the Santa Clara, California, company announced that it would split its hardware and software businesses.

That plan is now in its final stages. Last month, the company completed the physical separation of the two businesses, which have moved to different buildings. The actual breakup is expected to happen within the next six months or so.

Before the spinoff, Palm plans to conduct a reverse split of its shares, which would raise the stock price and reduce the number of shares outstanding.

Raising the stock price is needed not only to regain investors' attention -- Palm was recently demoted out of the Standard & Poor's 500 Index -- but also to ensure that the company stays listed on the NASDAQ, which won't trade stocks that languish below US$1.

"If all goes well," said Paul Coster, an analyst at J.P. Morgan Securities Inc, the spinoff will likely be "a big value creator."

Coster and other analysts say the Palm software business, once it's independent, may be able to draw a substantial number of new licensees.
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