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Five reasons for Palm's slide

Management errors and a failed spin-off led the company into the waiting arms of Redmond, analysts say.

When Palm ruled the handheld-computing market, few thought it would ever have to partner with Microsoft.

But a series of missteps, from manufacturing gaffes to strategic blunders, eventually made Palm's partnering with its longtime rival seem like a possibility--and, for both parties, a palatable one at that. While no one mistake can be blamed for Palm's difficulties over the last five years, many analysts agree that a combination of events both strengthened Microsoft's hand in the mobile market and made Palm more open to partnering with its old adversary.

"When viewed in conjunction with the sale of PalmSource (a Palm spin-off that now manages the Palm OS) earlier this month, it's an acceleration in the demise of the Palm OS platform and final confirmation that its once-dominant position in the broader handheld market is gone for good," said Carmi Levy, a senior research analyst at Info-Tech Research Group.

Palm's decision to use Windows Mobile software also highlights some of the missed opportunities and key moments in Palm's history that could have allowed the company to remain not only dominant but autonomous in the smart-phone marketplace instead of seeking the help of Microsoft.

So what happened?

Palm executives were slow to see the convergence of cellular phones and personal digital assistants.
Although it was arguably ahead of its time when it released the wireless Palm VII in May 1999, which included an embedded wireless radio, Palm was later outflanked by Hewlett-Packard's wireless iPaq and Research In Motion's BlackBerry devices as Palm failed to quickly recognize that consumers would want voice access and data access in the same gadget.

The company followed the Palm VII with a slightly more advanced product called the i705 in early 2002. Like the Palm VII, it used the same BellSouth Wireless Data network, formerly known as RAM MobileData. The service covered almost 300 metropolitan areas, but critics complained that the network was slow and that you never really knew whether the device was connected.

On the next go-round, later that year, Palm finally moved to using the higher-speed GSM (Global System for Mobile Communications) telephony network, but users of its GSM-enabled product, the Tungsten W, found the device cumbersome because they were required to use an ear bud to hear their phone conversations.

Partly because of its misstep, the company was forced to buy Handspring--founded by original Palm co-founders Jeff Hawkins and Donna Dubinsky--in June 2003 for $170 million. Analysts said the Handspring acquisition would have helped Palm because Handspring already had developed a substantial market for its Treo handhelds.

"Nobody buys traditional handhelds anymore," said Sam Bhavnani, an analyst at research firm Current Analysis. "The entire market underwent a paradigm shift. The mass adoption of cell phones eliminated the need for basic PIM (personal information management) functionality from a Palm Pilot."

"As popular as Palm has traditionally been with end users, it has always been a marginal corporate player."
--Carmi Levy, senior research analyst, Info-Tech Research Group

So far, the Treo has been a boon for Palm. In the last quarter alone, it shipped 470,000 Treo units. The full-function phone and handheld organizer offers integrated Bluetooth technology, a higher-resolution screen, multimedia capabilities, a removable battery, nonvolatile memory, an improved backlit keyboard and support for direct corporate e-mail access to Microsoft Exchange Server 2003.

Palm has had a hard time making its corporate customers happy.
Analysts say Palm just couldn't nail down the formula for over-the-air synchronization with Microsoft Outlook, which business users demand and RIM nailed with its BlackBerry device.

Synchronization between the Microsoft and Palm became a critical issue, particularly since Windows is already in 95 percent of corporate environments.

But problems arose. Some users complained that InstallShield, the installation software used in the devices, was incompatible with their particular Windows configuration. Security bugs also plagued the Palm OS early on, with viruses such as the Phage.936.

Another problem area for Palm: It is the only company developing its smart phones with its own, proprietary software, which has limited its reach outside of its own developer base, according to Robert Francis Group analyst Adam Braunstein.

"There is also an old-time mind-set among many IT-purchasing departments that branded items work better together," Bhavnani said. "For example, an enterprise might buy HP PCs, and also HP printers and HP iPaqs, because they all have HP on them and thus 'work better together.' The same thing is happening with Windows-based PCs and Windows-based phones."

Palm's inability to appease corporate customers became evident a few years ago, when Palm, which once had the vast majority of the handheld market, saw its share of the market drop by 26 percent to 851,000 units. Last November, handhelds using Microsoft's Mobile Windows operating system had sales of 1.4 million units, surpassing Palm for the first time in the number of handhelds shipped, according to a Gartner report.

"As popular as Palm has traditionally been with end users, it has always been a marginal corporate player," Levy said. "Palm OS has always lacked corporate-security features like encryption, virtual private networking and tight messaging connectivity, which has hindered its penetration into the enterprise."

The separation of Palm's hardware and software units failed to boost Palm's prospects.
Palm in 2003 spun off its software unit, now known as PalmSource. The idea was to create a thriving OS company that would license the Palm OS to lots of other companies. Instead, Palm has emerged as the main licensee of the Palm OS, forcing PalmSource to be dependent on a vendor with increasingly constrained resources.

But Japanese software maker Access said it would buy PalmSource for $324 million and focus on melding it with a Linux operating system. While PalmSource and Access have pledged to continue the Palm OS, its long-term future is uncertain.

Jeff Hawkins and Donna Dubinsky took their knack for innovation with them when they left in 1998 to start Handspring.
"Palm's biggest distraction was letting Jeff Hawkins and Donna Dubinsky leave," JupiterResearch analyst Michael Gartenberg said. "All those guys wanted to do is enjoy the fruits of their labor...It would have helped move things along a lot faster at Palm if they had stayed."

Hawkins, Dubinsky and Palm's marketing manager at the time, Ed Colligan, left Palm to found Handspring. The company's first product, the Handspring Visor, debuted in September 1999. Handspring differentiated itself from Palm in that it targeted the lower end of the market while creating the Treo handheld device.

It was about the time of the spin-off that Microsoft started looking at the smart-phone market in earnest, Gartenberg said, noting that missteps by other companies are the moments that Microsoft will always take advantage of.

Palm had a costly product-planning snafu that stalled its fast-growing sales.
Palm announced its m500 and m505 products early in 2001, before they were ready, stalling sales of older devices, such as the Palm V. Then, to compensate, the company massively overproduced the m500 and m505. In 2001, it got stuck holding onto excess inventory when sales of the devices fell short of expectations.

Some of those devices still linger in inventories, and it took the company a while to recover. Devices such as the Palm IIIx, which originally shipped in May 1999, are still for sale at places like Fry's Electronics.

Several analysts suggested that Palm will have to continue innovation on the hardware front--focusing, for example, on producing a UMTS (3G standard) version of the Windows Treo--if it is to better compete with products such as the BlackBerry, the Motorola Q, the Hewlett-Packard iPaq 6515 and at some potential point, a .

CNET's Ina Fried contributed to this report.