Palm's tale of Treo intrigue

Palm CEO Ed Colligan spent several days in Cannes in February 2004 talking up the Treo handheld computing device over its Windows-based competitors. But that same week, away from the massive 3GSM trade show, he was secretly meeting with the enemy.

At a nondescript Comfort Inn a short distance from the main conference center, Colligan and several Palm colleagues held a clandestine gathering with a team from Microsoft that was led by mobile unit head Pieter Knook. The groups took separate cabs to the hotel, met for several hours in a conference room, and then returned to the tech confab as though their rendezvous had never happened.

The secret meeting, to discuss business terms of a possible partnership, paved the way for the developers of the Palm operating system to join up with a company that had once been their fiercest rival.

Now Colligan and his Microsoft counterparts have gone public. On Monday, Colligan and Microsoft Chairman Bill Gates were on a ballroom stage at the far-tonier Palace Hotel in San Francisco to announce plans for a Windows-based Treo.

Rivals' fortunes tied
The combination seemed unthinkable just a few years ago. Palm envisioned itself as a substantial rival to Redmond, threatening to head off its computing dominance as the power of desktop computing shifted to pocket-size devices. But a series of miscues substantially weakened the company, leaving it little choice but to team up with the world's largest software maker.

Although Palm has pledged to continue using the Palm OS in both handhelds and phones, the company has now significantly tied its fortunes to the rival it once denounced.

In doing so, Palm is making a tough bet. The company is gambling that Microsoft's operating system has advanced far enough to power a decent cell phone, while still having enough rough edges that Palm can carve out a niche by going beyond the standard Windows Mobile software. In doing so, Palm hopes it can avoid the fate of being just another clone cranking out hardware on Microsoft's behalf.

Microsoft, meanwhile, has scored a significant win in its decade-long quest to crack the mobile market. In wooing Palm, Microsoft has brought a one-time rival into its fold and ideally gained a new creative force as it tries to move its PC empire into the burgeoning market for cell phones.

"Palm always did great work, and so we lusted after some of those things that they do well," Gates told reporters at Monday's launch.

The partnership is not totally out of the blue, of course. The two companies offered a glimpse at the detente last year, announcing a pact that allowed Palm OS-based Treos to connect directly with Microsoft's Exchange servers for corporate e-mail and calendar information.

But even as that deal was being announced, Microsoft and Palm were already meeting in secret to plan a much broader alliance. The companies followed their Cannes discussions with a meeting at another trade show in March. During the CTIA cell phone trade show in New Orleans, executives from the two companies met at Arnaud's, a well-known Creole restaurant in the French Quarter.

The two companies had booked a private room for the gathering. However, executives arrived and found their table was not yet ready, so they divided into their separate camps and headed to opposite ends of the 20-foot-long bar, pretending not to notice one another.

Code name Hendrix
Finally seated some time later, executives from the two companies, as they sipped bisque and ate Creole bruschetta, hashed out their marketing plans over a four-hour dinner one described as a "17-course extravaganza." The execs have fond memories of that meal, which sealed their partnership.

Rivals Palm, Microsoft team up Palm CEO Ed Colligan, Microsoft Chairman Bill Gates and Verizon Wireless CEO Denny Strigl

Following Hurricane Katrina, "we're wondering if that restaurant is still there," said Palm senior vice president Ken Wirt. (The 87-year old restaurant issued a press release on Monday saying that it is still assessing damage, but plans to reopen "as quickly as possible.")

Even when not trying to hide in the middle of the entire cell phone industry in New Orleans, the two companies went to great lengths to keep their relationship a secret. In phone calls and e-mails they referred to one another only by code names. Microsoft was "Woodstock," Palm was "Purple Haze." The Windows-based Treo itself was called "Hendrix." Anyone who forgot to use the psychedelic pseudonyms was fined.

When attending a meeting at Palm's offices in Silicon Valley, Microsoft workers were reluctant to offer up their affiliation to a security guard who was printing visitors' badges. After failing to convince the guard, the delegation spent an awkward few minutes

in the lobby, with their hands across their chests to cover up the labels that indicated their company affiliation.

"We were frankly scared out of our mind about leaks," said Scott Horn, a senior director in Microsoft's mobile and embedded device unit.

Palm executives tried to do the same when they visited Redmond, opting for generic bags over the standard corporate issue gear. However, several failed to remove the bright orange luggage tags emblazoned with the company's new Palm logo.

"Clearly none of us are going to be spies," joked Page Murray, Palm's vice president of marketing.

In its secret meetings, Palm execs managed to convince their Microsoft counterparts to build several software hooks they needed into the latest version of Windows Mobile. The changes allowed Palm to add some handy features into the Windows version of the Treo. One new trick allows Treo owners to ignore an incoming cell call, instead sending a brief text message to the caller. A second feature allows Treo owners to navigate multiple voice-mail accounts using VCR-like buttons, rather than having to know that "5" is the key for fast forward or remember that "7" saves voice mail at work, but deletes it at home.

A key question, though, is whether Microsoft will give Palm enough room to innovate in the future, now that it has successfully wooed the device maker. By going with Microsoft, Palm is letting go of one of the key differentiators between its products and those from better-known competitors.

Colligan said he understands the risk and only undertook it with assurances that Palm would be able to build enough software on top of the OS to make his products stand out.

"It was the only way we felt it could work for us," he said at the Monday press conference.

Executives from both companies suggest that the Palm-Microsoft relationship, forged at those meetings in Cannes and New Orleans, will continue to be close. But it remains to be seen whether Palm will retain its individuality now that it has the Microsoft imprimatur.

Wirt acknowledges that there are no formal procedures in place that ensure that Palm will get the things it asks for the next time, or the time after that. "It's functioned more as a relationship-type thing."

Colligan said Palm could try to patent particularly strong advances, but in general he said the company believes the best way to stay ahead is to keep cranking out new products.

"We have ideas about many things that we didn't get to do in this version," he assured reporters.

But for all its ideas, Palm is still a relatively small company. And given that it has pledged continued support for the Palm OS, it must now divide its limited engineering resources between two incompatible efforts.

Colligan acknowledged that the challenges of developing for two entirely different operating systems are enough to keep his firm hopping. He emphatically shook his head back and forth when asked if Symbian and Linux-based Treos might be next.

"We don't need another operating system," he said, adding later, "It's too much effort."