PalmSource to Go Indie in Q1

PalmSource Inc., the company responsible for the Palm operating system, is to undergo the much talked about "one-step separation" from its parent, Palm Inc. (Nasdaq: PALM), before the end of the first quarter of 2003, according to Albert Chu, PalmSource's VP of business development.

"This will happen at the end of the first quarter," says Chu. "PalmSource will have its own ticker on Nasdaq and Palm shareholders will get PalmSource stock, though the exact ratio of how many shares each will get is yet to be determined by our investment bankers."

He believes this will help the parent company attain a more realistic valuation, as Sony Corp.'s recent investment in PalmSource (see Sony Invests in PalmSource) valued the OS business at about $300 million, while the whole of Palm Inc. (including PalmSource) has a current capitalization of $443 million. "This values the hardware part of Palm Inc. at less than $150 million, and we believe this makes it undervalued."

Palm's current share price is $15.30, with a 52-week high of $98.80 and a 52-week low of $9.76.

"We are looking forward to the separation. We are already in a different building a few miles away from Palm, which is a better building and much cheaper to rent -- about 20 percent of what we were paying before. Moving out has made a difference to us, psychologically, and to the companies that license the operating system from us. They don't feel like they are visiting the building of a competitor any more," says the PalmSource man. "It also makes it easier for us to talk to companies that previously were reluctant to engage with Palm [for competitive reasons]."

Currently there are nine companies other than Palm itself that license the OS for use in their products, and they may have felt uneasy while talking about their product roadmaps while visiting Palm's buildings in Milpitas, Calif., where PalmSource was based until recently. Those nine are:

Acer Inc.;
Alphasmart Inc.;
Garmin Ltd.;
HandEra Inc.;
Handspring Inc.;
Kyocera Corp. (NYSE: KYO);
Sony Corp.;
Samsung Corp.; and
Symbol Technologies Inc. (NYSE: SBL).

The PalmSource folk are banking on adding to this list, once the split from Palm is complete. The company's CEO, former Apple Computer Inc. (Nasdaq: AAPL) and AT&T Corp. (NYSE: T) man David Nagel, says PalmSource will announce new licensees in the "next 60 days," though they can't yet be named, as they do not have finalized products. Some will be exclusive to PalmSource, others have already licensed other operating systems. He hinted, though, that these new partners would be delivering focused devices in the areas of entertainment, location-based services, and wireless connectivity.

It could well be that one or more of these new licensees will be announced on December 11 in Beijing, when PalmSource kicks off its push into China. At the moment, the only PalmSource-based products in China are there via the "grey market," says Chu, though some of the licensees are launching products in Hong Kong. "The potential for handheld devices in China is enormous. Today there are many niche, single application [translator, organizer] products based on local, proprietary operating systems. We are talking to the key Chinese PC vendors that are looking to break into the handheld market."

Chu also hinted that December 11 would see the launch of a PalmSource OS that is "fully localized" in terms of character sets. Currently, overlay applications are available for different language characters, but it is more efficient to have such localized functionality built into the base OS, states Chu.

Of massive potential in China, and indeed globally, is the market for handhelds with wireless networking capabilities. PalmSource's own research (10,000 people surveyed in five countries) suggests that while the majority of the 18 million or so handheld/smart devices sold in 2002 are unconnected standalone products, by 2006 the total sales will top 60 million, and the majority will incorporate wireless connectivity functions. And possibly even as soon as 2012, the sales of standalone devices will be strongly diminished. "We are encouraging all of our developers to become wireless savvy -- we want the best wireless-enabled applications available. And, of course, the carriers will love this as it will encourage traffic on their networks."

Wireless is definitely an area where PalmSource needs to strengthen its hand, says Mark Lowenstein, managing director of consultancy Mobile Ecosystem. "The PalmSource OS is not so strong in wireless. I think it has a 12 months to 18 months window of opportunity to capture the wireless market, as its competitors are in the early stages of development. Although I think it's positive that PalmSource is being decoupled, I am not so sure I am optimistic about the future of the OS with regards to the demands from the market for a rich operating system and thick clients. But I don't see a groundswell for wireless device vendors going to PalmSource. Look at Sendo last week [see Sendo Dumps MS for Nokia]. It went to Symbian Ltd., not PalmSource, when it moved from Microsoft Corp."

Ah yes, Microsoft. Both Chu and Nagel were speaking at a press event to introduce the PalmSource OS version 5.0 to Europe. The new version is tailored much more for wireless connectivity than previous versions; obviously mindful that Bill Gates has his eye increasingly on wireless, Nagel spent as much time dissing Microsoft as he did praising his own firm and the advances to be had from OS v5.0. So why, then, is this new operating system not featuring on Palm's new wireless device, the Tungsten W, which features OS v4.1 and is due to launch early in 2003?

"Well, the certification and testing processes for products that will work on wireless networks is much longer than the non-wireless products," says Chu. "We launched version 5.0 in June this year, but the demands for product were such that development had to start before then. The Tungsten T [no phone features] is already available, so you can see how quick that product came to market. But the testing process for working on wide area networks is six to nine months. It will be available early next year, through AT&T Wireless Services Inc. in the U.S., Rogers Wireless Communications Inc. in Canada, Vodafone Group plc in Europe, and other carriers in Asia and Mexico."

That's eating into that window of opportunity, then.

— Ray Le Maistre, European Editor, Unstrung www.unstrung.com