Is Linux Palm's savior?

Long a fan of the handhelds and operating system, the Commerce Township, Mich., freelance writer has watched both decline over the years following inventory problems and a cooling of the once-hot handheld market. Hardware maker PalmOne remains the market leader, but the OS company, PalmSource, is, as one analyst put it, "a company in transition with a risky strategy."

Broida is more plainspoken.

"They were the leader, now they're the follower," he said. "There's no question Windows Mobile has passed it by in certain areas and the Palm OS has not kept up. It just seems like they're sitting on their hands."

After ambitious plans to embed the operating system in new classes of devices such as smart phones and advanced phones--which were expected to far surpass the handheld industry in terms of shipments and growth--PalmSource is struggling against similar suppliers, a shrinking market and fewer manufacturers interested in its operating systems than expected.

This is not what executives had in mind when they first broke off from handheld maker PalmOne in 2003. When PalmOne and PalmSource were part of Palm, licensees were concerned that the OS company would favor the hardware company when it came to making new software features available. The split was expected to allow PalmSource to seek more licensees without having them worry about competing directly with PalmOne.

But instead, the number of PalmSource licensees shrank. Sony left the handheld market, and PalmOne acquired Handspring, which was No. 2 in market share.

Wrestling with Redmond
The tough times have continued for PalmSource. Its chief executive, David Nagel, abruptly resigned Sunday without giving a reason, and for the first time devices shipped using Microsoft's handheld operating system surpassed the Palm OS for the year in 2004, according to research firm IDC.

Microsoft is also expected to increase its lead in the handheld market--this year 49 percent of handhelds shipped worldwide will use Windows Mobile, and by 2009 that number is expected to jump to 56 percent. PalmSource's share will shrink from 44 percent in 2005 to 38 percent by 2009.

More troubling is the fact that traditional handhelds are still the major source of PalmSource's revenues. That's not the way it was supposed to be.

The company has developed Cobalt, a new OS for smart phones, but customers have yet to release a device using it.

"Cobalt was supposed to bring them significant growth through new licensees and new form factors," said Kevin Burden, a research analyst with IDC. "Oh my god, yeah, it's been slow in coming--that's a nice way of putting it."

But PalmSource says devices using Cobalt are on the way.

Interim PalmSource CEO Patrick McVeigh said the "pipeline" for Cobalt is building nicely and declined to further elaborate. He did note, however, that it typically takes smart phone makers roughly 18 months to develop new products.

One developer with an Italian company that makes software for PDAs and smart phones attributed PalmSource's licensing woes with Cobalt to the timing of the company's product announcements.

Shortly after PalmSource was spun out, the company announced its new operating system, Cobalt 6.0. In announcing the new OS, the company also highlighted its product road map, which included a feature-laden version, Cobalt 6.1.

"Showing the road map was an error, because the licensees wanted to wait for 6.1," the Italian developer said. "The first version had no phone features, no VGA and no Bluetooth. It only had the user interface, so it was too expensive for the licensees to develop."

So as a number of licensees patiently sat on the sidelines waiting

After Cobalt 6.1 came out, PalmSource soon announced it had acquired China MobileSoft and, as a result, would offer Linux.

"When they announced they would offer the Palm OS on Linux, licensees wanted to wait for that, so the same thing is happening," the developer added.

Hong Kong-based device maker Group Sense PDA said it would ship a smart phone based on Cobalt in the United States by the fourth quarter. But will it be tempting enough for carriers, who, as Burden said, "hold all the purse strings"?

Device makers and cellular carriers will likely want to go with a more tried-and-true OS for new cell phones, such as those from Microsoft, Symbian and Research In Motion, Burden said.

Sibling squabbles ahead?
A major source of concern for the company is its relationship with its No. 1 licensee and former sister company PalmOne. The handheld maker renewed its operating system license from PalmSource through 2009 for a minimum royalty of $148.5 million.

The deal ensures steady revenue. However, sources have said PalmOne has evaluated both Microsoft-based operating systems and at least one version of Linux as a potential alternative operating system to the Palm OS for its handheld devices.

Sources familiar with the tests said PalmOne has been quietly exploring operating systems to augment the Palm OS for some time. The company has also been exploring partnerships that could let it use a tailored version of the Linux operating system to run on its devices.

PalmSource has a Linux solution in the works. Cobalt will also be ported over to the new PalmSource Linux operating system once it has been developed, McVeigh said.

PalmSource's China MobileSoft acquisition was designed to expand the company's global presence and put Linux applications squarely in its product plans.

While the Palm OS will run as a software layer on top of Linux, and PalmSource plans to contribute to the Linux community, the company won't release the Palm OS code to the public.

PalmSource could have a Linux-based operating system available in 18 months, said Pablo A. Perez-Fernandez, an equity research analyst with Stanford Financial Group.

"It would cost less to develop and give them more opportunities especially in China," Perez-Fernandez said. "However, it's a risky strategy since they don't have any licensees yet...they wouldn't see a big increase in revenues for four to six quarters."

The Linux-based operating system would allow PalmSource to tap the potentially large feature phone market, which encompasses phones that aren't advanced smart phones like the Treo 650 but that include digital cameras and other capabilities beyond sending and receiving calls.

The operating system would allow carriers to incorporate a standard operating system into feature phones, which make up a majority of the phone market. By 2008, worldwide shipments of feature phones will reach 575 million units, far bigger than the smart phone market, Perez-Fernandez said.

The risk? Plenty of development remains to be done on the Linux operating system.

"There's a lot of interest," Perez-Fernandez said, adding "but that's very different from commitment."