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Is Palm ready for the handheld challenge?

3Com's decision to spin off its Palm unit into an independent company heightens the scrutiny of Palm's relationship with Handspring, which is set to release its first product tomorrow.

As Palm readies itself to operate as an independent company, industry observers wonder if it can handle the heat from a string of new personal digital assistant competitors.

3Com's announcement today that it plans to spin off its Palm Computing subsidiary into an independent, publicly traded company heightens the scrutiny of Palm's relationship with Handspring--its highest-profile licensee and competitor--which coincidentally is set to release its first product tomorrow.

Handspring, founded by Donna Dubinsky and Jeff Hawkins--both cofounders of 3Com's Palm line--is set to release its first products based upon the Palm operating system tomorrow. Handspring's Visor combines the popular Palm operating system and third-party software capabilities with a lower price and attention-getting add-ons like an MP3 player, cell phone, and game cartridges.

With two models priced at $149 and $249, Handspring is expected to grab market share from the industry-leading Palm.

Unlike existing Palm devices, Visor features the Springboard expansion slot, which allows users to upgrade the device with third-party cartridges. Springboard add-ons so far include an MP3 player from Diamond Multimedia, a two-way pager, a modem for Internet access, and video games, sources say. Also reportedly planned for the device is a cell phone and wireless modem Springboard add-on. Handspring declined to comment on the details of the new product.

But Palm's announcement grabs some of Handspring's momentum going into its launch, analysts say. Although the move has been rumored to be in the works for months, the timing seems suspect, many observers have noted.

"Handspring is no longer the only show in town," said Scott Miller, an analyst at Dataquest. "They had effectively become the focal point for most of the industry."

Palm Computing president Alan Kessler said the timing of the announcement was "just a coincidence."

"This gives us the ability to establish relationships and partnerships that we might not have been able to do, at a time when the handheld market is exploding," said Kessler, who described himself as a "candidate" for the CEO of Palm Computing once it has become independent.

For its part, Handspring released a statement indicating support for Palm's independence from 3Com.

"We have always believed that the handheld computing business is fundamentally different than the networking business and requires a unique focus," according to the Handspring statement. Handspring president Dubinsky was chief of Palm when it was acquired by U.S. Robotics, and then 3Com.

Kessler denied that the companies' differences have hindered Palm's success. "It's hard to argue with the success of what 3Com meant to Palm Computing," he said. "The numbers are right there. But there are advantages to being separate. The solutions and technology of each company is not 100-percent connected, in many ways."

And more important than stealing Handspring's thunder, the move means more financial freedom for Palm, analysts say.

"From Palm's standpoint, this is great. They become their own entity," said Jill House, an International Data Corporation analyst who covers handheld computers, in comparing the new Palm push with Microsoft's efforts to establish its efforts as the dominant handheld platform through aggressive hardware and software licensing.

"Now they're saying, 'Not only is Handspring not going to kill us, it's going to help us,'" she added.

As a separate entity, Palm will no longer be subjected to the budgetary and pricing constraints that it had to deal with as a subsidiary. Despite its status as 3Com's fastest-growing business, Palm had to struggle for its share of its parent company's resources, sources say. After raising money in what will likely be a highly anticipated IPO, the company will also be free to strike a more aggressive pricing strategy.

Handspring, whose $149 Visor will be priced significantly under even the lowest-priced Palm, has much more flexibility on price than Palm because it isn't subsidizing a struggling networking company, said Miller.

"Palm doesn't have a whole lot of room to move around in terms of pricing because of the 3Com 'tax.' One of the concerns for Palm had to be that Handspring would eviscerate Palm's hardware base over six months to a year," he said.

Microsoft's position
Analysts are still up in the air about what the news means for Microsoft, whose Windows CE devices had offered the only real competition to Palm. Windows CE palm-size devices currently only account for around 25 percent of the market, according to IDC, but Microsoft's upcoming operating system enhancements may prevent it from being relegated to also-ran status, analysts caution.

"The momentum is on the Palm side, and next year the hardware momentum will shift to Handspring," Miller said. "But the Microsoft platform will get more exciting, and should be more interesting next year."

On the flip side, the separation allows 3Com to support Microsoft's Windows CE handhelds, which compete head-to-head with Palm devices.

"We may have to support connections with Win CE devices as we do of the Palm," said 3Com CEO Eric Benhamou. The spin-off, he added, gives 3Com "the full freedom of partnerships."

News.com's Wylie Wong contributed to this report.