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The week in review: 3Com to spin off Palm Computing

3Com says it will spin off its Palm Computing subsidiary, only months after declaring the handheld market leader was a key part of the networking company's long-term strategy.

3Com revealed plans to spin off its Palm Computing subsidiary, only months after saying the handheld market leader was a key part of the networking company's long-term strategy.

Despite Palm's runaway success--the company boasts more than 5 million customers--it was seen by many industry observers as tangential to struggling 3Com's core business. The move comes as Palm is set to face increased competition; it also opens 3Com up to renewed talk of a merger.

3Com said it will float an initial public offering by the end of this year or early next year, selling 20 percent of the Palm venture's shares and retaining the other 80 percent. Within six months, the company will transfer the remaining share stake to 3Com's shareholders, executives said.

Palm Computing had sales of $570 million in fiscal 1999--representing about 10 percent of 3Com's total sales, according to the company. But chief executive Eric Benhamou had told CNET as recently as this spring that 3Com's Palm business had a "central place in the future" of the company due to its success as a business and its future role as a means to create more network connections, thereby increasing sales of the company's network switches.

The possibility of a merger with a telephone equipment maker--such as Lucent Technologies or Sweden's Ericsson--set Wall Street buzzing: many analysts say the move makes 3Com a more attractive acquisition candidate. Financial woes fuel the speculation. After a lackluster quarter in March, 3Com has struggled to define its business strategy and has spent the last six months reorganizing its corporate structure.

The move came one day before Handspring introduced its first handheld, becoming the second company to market a device based on the Palm operating system. The much-anticipated Visor begins at $149--less than a Palm--and features an expansion slot for adding software capabilities. Handspring, formed a little over a year ago by Palm cofounders Donna Dubinsky and Jeff Hawkins, believes the ability to easily add features is key to the Palm operating system's growth.

Elsewhere in the handheld market, Palm will unveil its Palm Vx model on October 4, while Compaq and Hewlett-Packard will release Windows CE-based devices in coming weeks.

The federal government moved to loosen controversial restrictions on the export of data-encryption software, proposing to allow companies to export their strongest retail security software without obtaining individual licenses for each customer. Companies would still have to seek a one-time license for their software and help the government track the sales of the strongest security products around the world, and it's not clear that the moves address the standings concerns of privacy activists. Still, the proposed changes, which have yet to be drafted in full, have long been sought by Silicon Valley and are among the most significant moves the government has taken in backing away from its original hard-line stance on the encryption issue.

A Congressional panel ordered to study Internet taxes got a late start, is still fishing for money, and faces a tight deadline to resolve complex problems that have eluded answers so far. The controversy involves whether and how to tax Internet commerce, which is expected to reach $1.3 trillion by 2003, according one study.

The more things change
A controversial provision in Sony Music contracts effectively asks artists to sign away control of their official Web sites for life. The company has added language to its standard contracts that obtains ownership over an artist's name--as well as any variation of it--for use as a domain name. Moreover, the clause is written as a lifetime provision that would apply even if the artist and Sony part ways.

Time Incorporated is decentralizing its new media business, assigning online responsibilities to its respective magazine divisions such as Time and People, according to an internal memo circulated at the media giant. The move marks yet another restructuring of the company's Internet business, which struggled under the Pathfinder Web strategy.

Six months after closing down firearm sales on its site, eBay said it will soon forbid sales of alcohol and tobacco products as well. Unlike the uproar that surrounded the auction leader's decision on firearms and a more recent policy retreat on so-called reserve auctions, the announcement seemed to leave most eBay users feeling indifferent. Later in the week, the company added it would prohibit some software and music sales.

A group of alternative trading systems plans to share stock quotes after hours without the involvement of the major U.S. exchanges. The initiative owes to their growing impatience with the pace of reform, an executive close to the deal said.

The cable world
Telecommunications giant Motorola agreed to buy General Instrument in an $11 billion stock swap. The move takes the ever-changing cable market in an unforeseen direction. Motorola has already become a leading manufacturer of phones that are sold with wireless services such as Cellular One, and could employ a similar strategy by selling GI TV set-top boxes with service through cable operators such as AT&T.

Sony too moved into the burgeoning market for advanced cable services with a $1 billion deal to supply new television set-top boxes to Cablevision Systems. Sony will build at least 3 million digital boxes that will be available to consumers next summer, and will install the networking equipment and software needed to offer services that the two companies are developing. The agreement marks the first time Sony will supply equipment for delivering advanced digital services such as Internet access to cable operators. Sony has manufactured set-top boxes for satellite services such as DirecTV, but not cable lines.

Separately, the Japanese electronics giant detailed its plan to turn its new PlayStation2 game console into a center for pushing "electronic content" in the home. The device could eventually compete against PCs and networking devices as the nascent market for home networking catches on.

One week after its noticeable absence from Sega's Dreamcast launch, Microsoft announced the availability of software for developers that should speed the creation of Windows CE-based games. Microsoft and Sega announced a year ago that the Dreamcast game console would run Microsoft's Windows CE operating system, but the release of the Windows CE toolkit is the only outward sign that the two companies have been working together at all.

Meanwhile, Sega and Planetweb, which makes the Dreamcast browser, acknowledged that the device's browser has some drawbacks, including include faulty support for JavaScript; lack of support for Java; and an interface that may not live up to users' expectations formed by years surfing with browsers made by Netscape Communications and Microsoft.

Modern networking
Convergence, the idea of using a single Internet-based network to deliver voice and data traffic, continued to generate fanfare at an important networking trade show as companies such as Cisco Systems, Nortel Networks, and Lucent Technologies hawked strategies to migrate their corporate customers to updated networks. But convergence may be reaching a peak before companies actually take the steps to adopt the new technology.

A bitter struggle among equipment manufacturers is threatening new industry rules that could make high-speed Internet connections less expensive, easier to use, and available to far more people. The infighting centers on the so-called G.lite standard, designed to ease the installation of DSL technology.

Increasing competition and falling profit margins have forced Qualcomm to consider selling its handset business, suggesting the wireless industry is facing the same pricing pressures as the personal computer market. Qualcomm has long operated in the higher end, but many consumers--conditioned by inexpensive PCs, free ISPs, and other low-cost technology products--want cheap phones.

AT&T outlined a new component in its ambitious Web business strategy, saying it plans to offer high-speed Internet access across the country over both cable and telephone lines. The moves fill what had been a large hole, in a market that has increasingly attracted AT&T's large competitors and start-up companies that offer their own high-speed Net services.

The giant also staked out its intentions of becoming a leader in the Web infrastructure business a bit before it has the ability to deliver. AT&T already has the network it needs to reach its goal, but doesn't yet have the technology or physical facilities to reach the scale it foresees.

About the time Apple delivers the first iBook portables with wireless networking, Dell will offer a similar feature for business notebooks. Dell Computer is chasing Apple in the rush to wireless notebooks, the latest indication that the market is on the verge of taking off.

Also of note
America Online quietly launched a new Web search engine ... Microsoft unveiled more networking features in its forthcoming Windows 2000 operating system in hopes of winning a bigger chunk of the lucrative corporate market ? The U.S. market for online retail sales will increase to $125.6 billion in 2003 from $11.5 billion last year ? The Motley Fool closed $26.5 million in its first round of venture capital financing, after five full years of operation.