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Commentary: Getting a grip on Palm

Carl Yankowski's resignation as Palm CEO a mere 23 months after he took the job mainly results from a series of missteps by the company.

By Todd Kort, Gartner analyst

Carl Yankowski's resignation as Palm CEO a mere 23 months after he took the job mainly results from a series of missteps by the company.

See news story:
Yankowski out as Palm CEO
First, Palm has failed to establish a position in the high end of the PDA (personal digital assistant) market. The company should have started years ago to work with Intel--located only a stone's throw away in Santa Clara, Calif.--to develop a high-end version of the Palm operating system based on StrongARM processors. Instead, that project was started only last July and will probably take until the second half of 2002 to bear fruit.

Started sooner, the alliance might have helped protect Palm from incursions by competitors such as Microsoft and Compaq Computer. However, by focusing solely on simplicity, Palm left the door wide open for those competitors to take over the most profitable segment of the PDA market.

Palm's worldwide market share now stands at about 30 percent, down from more than 50 percent a year ago. Despite roughly 14 million units actively in use, Palm's lack of innovation is evident when one compares the company's current products to those of two years ago.

For example, Palm still has no answer for the RIM Blackberry in the wireless arena. The company has also failed to articulate a clear corporate strategy, relying instead on partnerships with a few major software companies to gain entry into the corporate market.

Palm will soon split into separate companies, with one focused on hardware and the other on software--primarily licensing of the Palm OS. About 92 percent of Palm's revenue is generated by hardware, and it therefore makes sense for Palm to split up since the software side of the business seeks to encourage sales from companies such as Handspring, Sony, Symbol or HandEra, while the hardware side wants to beat them out of sales.

In the wake of Yankowski's departure, David Nagel will head the software unit, and Chief Operating Officer Todd Bradley will be in charge of the hardware business, at least temporarily. Palm said that a search is under way for a new leader who understands wireless technologies and knows how to attract corporate customers.

The new leader will have his or her hands full. The financial health of Palm OS licensees will be strained in the next few quarters as the company readies a new operating system for processors based on an ARM core. Many customers will likely delay new purchases in anticipation of the new operating system. Combined with current economic woes in the PDA sector, that could freeze sales and throw already weak companies into deeper trouble, leading to consolidation within the "Palm economy."

3Com completed its spinout and distribution of Palm shares on July 27, 2000. If any company were to acquire more than 50 percent of Palm shares within two years of that date, it would incur considerable tax liabilities. The company will be a much more attractive takeover target after that date, and Gartner believes that Apple Computer and Sony would be among the potential buyer candidates.

(For a related commentary on Palm's plan to separate its operating system business, see Gartner.com.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.