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Sizing up PalmOne's next moves

Ed Colligan played a central role in the handheld maker's revival. Now he faces hard choices about working with Microsoft and Linux.

More than most people, Ed Colligan is well acquainted with the ups and downs that punctuate the handheld-device market.

Along with Jeff Hawkins and Donna Dubinsky, Colligan was part of the troika that left Palm to establish rival Handspring. However, after the handheld market slowed, Handspring was acquired by Palm around the same time Palm renamed itself PalmOne and spun off its software division. At PalmOne, Colligan found himself at a familiar, but new, company.

Though PalmOne retained its position as market leader, the company was hounded by the perception that it had lost its way. But with the rising popularity of the Treo 600 line, PalmOne's prospects are again on the upswing--thanks in no small part to Colligan.

Charged with leading PalmOne's wireless unit, Colligan picked up where Handspring left off in developing the Treo device and ironing out deals with key cellular carriers. More recently, he was appointed PalmOne's president.

In that new role, Colligan may have to make some hard choices in the not-so-distant future. Sources say PalmOne has tested and evaluated a version of the Linux operating system and of the Microsoft OS that would presumably run on its devices. The move would open up new markets for PalmOne, but it could hurt Palm OS developer PalmSource.

Colligan recently sat down with reporters in our CNETAsia office to talk about operating systems, devices and competitors.

Critics suggest PalmOne is behind the technology curve. Do you accept that?
I probably would have accepted that a year ago. I think the category-defining products in this space are at PalmOne. You read any review of any smart phone, and the Treo 650 wins. So I don't accept that premise.

I think the Tungsten T5 is very creative, and (it's) trying to change the way handheld computers are viewed, too. Most of them are glorified organizers. That's fine. We're trying to do something different here where we create a very high capacity device that will allow people to carry their most important digital information with them. I think that will be a new trend in handhelds, and we're starting that trend in motion.

What is this we hear about PalmOne looking at other operating systems?
We recently split from PalmSource. As part of that, one of the premises was that we could develop on other operating systems, and they could license to a broader set of people. So every time we ever do a new design, we don't really look at the technology first. We try to look at what the user's going to want, and if there are opportunities in the market.

So we consistently look at other operating systems. That doesn't mean we're going to ship products on them. So we've had a very long history with the Palm OS. It's served us extremely well in the marketplace. There are tens of thousands of developers, and lots of applications, on it, and we think it's great. We're going to stick with that for now, and if we decide to move to other operating systems, I'm sure we'll communicate that to you at the time.

Are you saying there are no plans now?
I can't comment on future product directions. We really don't get into that.

You did say that you evaluate other platforms. What's good about Linux or Microsoft?
Linux is an open platform that has a different licensing structure. So there's some value in that. And it's more open to the developer community than a lot of operating systems. So there may be some value in that. On the other hand, it's very immature relative to this segment of the market, so there'll have to be a massive development effort to support that.

We consistently look at other operating systems. That doesn't mean we're going to ship products on them.

Microsoft obviously has enormous resources to throw at the marketplace. They are particularly strong in the enterprise. They may have some more features, specifically in the media area, where they've probably advanced the platform a little more aggressively than Palm has.

So there are advantages to all these things, and you really have to look at what target market we are really going after. It's a massive effort to go and develop on another platform. It's not a trivial thing. It's not a decision we would make lightly, and we really have to feel like we are going to swing the market in a completely different direction to do it.

How do you view Microsoft?
How do I view Microsoft? I view them as one of the most successful companies in the history of the world.

So are they a rival or a competitor?
Certainly they license to people that I consider to be rivals and competitors, but I don't look at them specifically as a competitor. In fact, we recently did a licensing deal with them for ActiveSync and we're the first people to do that on an alternative platform that I know of.

The key thing for me, from a Microsoft perspective, is seeing how powerful they are in the marketplace and leveraging the point of power that is, to me, more on the server side and desktop side than it is on the device side.

Your deal with PalmSource is a $40 million-a-year commitment that runs till 2006. Is there any commitment beyond that?
Not at this stage. I expect to continue to work with PalmSource into the future. But there's no commitment at this stage.

Assuming royalties of $10 per unit, that means you need to sell 4 million PalmOne devices to fulfill that commitment.
It's really not an important number. At the end of the day, we make business decisions based on where we think we can grow the business and not look at sunk costs. Those are sunk costs. It's a relevant data point, but it's not one that you'll change your fundamental business decisions around. We're committed to that $40 million, and whatever per-unit price that is, that's what it is. We have that as a relationship and a commitment. We'll have to deal with that. If we want to move to another platform, we'll only do it because we believe there's a big opportunity to do it, beyond whatever differential that commitment is.

What's happening in China?
We don't have as effective a product as we could have in China. What's happening in China is us continuing to sell our handheld products more than anything. We do not have significant relationships with a carrier at this stage to sell the smart phones. And we do not have a native Chinese OS support there, so you end up being dependent on overlays, which is fine, it's a reasonable user experience, but it's not optimum.

When you do mobile products, there is a series of trade-offs.

In addition to that, we did an enormous amount of application development on top of the Palm OS for the Treo to do all the telephony and SMS (short message service) functionality, and that has not been localized at this point. We don't have as effective a product as we could have in China. We absolutely have our sights on that. We would absolutely love to make that a bigger opportunity for us. Right now, we continue to sell the handhelds there. We recently launched the T5 there.

There was a report not too long ago claiming that PalmOne had quit China.
Rumors.

How about the one that says ECS (China) and Digital China have stopped distributing Palm products, leaving Worldlink as the only distributor in China? Digital China is the largest distributor over there.
So what? They're not necessarily right for you. One of the things you find when you're trying to enter markets is that it's much more important to have a very focused, dedicated distributor relationship, because they help you make the market by marketing effectively. And if they have a lot of competition, which drives down price, they don't have the margin differential to enable them to reinvest on your behalf in the market.

I think it's very smart to consolidate the number of partners, to make sure we have one that we think is excited about our business and is going to help us build it as effectively as possible. The only reason to add people over time is to increase your share over time. But when you have a 4 percent share, you have a lot of room to run with a dedicated player.

How's the Treo doing compared with the rest of the Palm line?
The company in general has had some spectacular growth recently and has produced five consecutive quarters of profits. The Treo was about 50 percent of our (revenue) last quarter. And the handhelds, obviously, the other 50 percent.

How much is the Treo line projected to grow?
We are looking at a 36 percent year-on-year growth rate for the company. We don't break out each one of the product areas in particular. The market pundits say something more in the range of 60 or 70 percent for converged device growth, year over year. We are trying to be reasonably conservative about that, but we expect to see significant growth in the Treo as well.

Last quarter you had 50 percent of your revenues from just one model of the Treo. Are you going to have more products in that family?
Sure. Absolutely. We're working hard. We've got a very broad roadmap, trying to develop some new products. What we're trying to do with the Treo is set a baseline. It's a new market, a new foray for us in the sense of making cell phones, converged devices and so we really need to get the expertise to do that well.

From here, we can expand in a number of different ways. Probably the most important is along the application line and also form factor and design and so forth, making a broader product line over time. You can expect us to do that.

How do you decide what features and form to use in your smart phones?
I think these products are by far the hardest to design of anything I've ever been a part of. When you do mobile products, there is a series of trade-offs between all the different features, form factors, battery life, complexity, screen real estate. You need to trade off a lot of them to make great winning products that people really love to use and want to carry with them anywhere.

You see a lot of products that come to market with just a little something wrong with them. It doesn't take a lot to make it not successful.

Is it then a concern that the guys from O2 and Hewlett-Packard are coming up with triple wireless devices and megapixel cameras and you're not?
Sometimes it's a concern, but we made those trade-offs for reasons. We think they're legitimate reasons. In different markets, it may matter more or less. We may be less successful in some markets than others because of those trade-offs.

For us, the camera thing is a good example. We could have put a megapixel camera into the Treo 650, but it's a lot slower and it still doesn't create an image that is print quality. So now you are sending a bigger file over the Net, which is quite a bit slower. And looking at any image you create from the Treo 650, which is what most people do with it, the VGA images on our screen are great.