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Challenges ahead for Palm
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November 13, 2001: 7:41 p.m. ET
Company should be operating as two businesses by year's end.
By Staff Writer Richard Richtmyer
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LAS VEGAS (CNN/Money) - With increased competition, a sluggish economy which has squelched corporate and consumer spending, and an industry many believe is on the verge of substantial changes, handheld computer maker Palm will face some stiff challenges if it is to remain the dominant handheld platform.
One of the ways it has decided to meet those challenges it to effectively split into two businesses. By the year's end, Palm (PALM: down $0.14 to $2.54, Research, Estimates) is expected to be operating in two distinct subsidiaries.
One group, called the solutions group, will be responsible for developing and selling Palm's handheld computer hardware. The other, called the platform solutions group, will be responsible for developing and selling the Palm operating system, which the company licenses to several other vendors, including rivals such as Handspring and Sony, as well as some manufacturers of mobile phone and other wireless communications devices.
In late August, Palm tapped high-tech industry veteran Dave Nagel as chief executive for the platform group. Nagel - who most recently was AT&T's chief technology officer, and before that, senior vice president for product development at Apple Computer - is taking the reins at what is one of the most challenging periods of Palm's history.
In addition to the increased competitive pressure from competing handheld platforms, Palm this year has been faced with a sharp and sudden slowdown in technology spending, as well internal missteps with resulted in delays in shipments of its new products.
We caught up with Nagel at the Comdex technology conference taking place here this week.
Q. What does 'splitting' the OS division off entail, logistically and for all practical purposes?
A. The best way to look at this is to start where we came from. Initially, most of the people in this group were really a development group. They developed operating system technologies - the applications, tools and other stuff surrounding it. It really was never constructed in effect as a business - not much in the way of marketing; not much in the way of formal support for the platform.
The company made the decision to license a couple of years ago, and we've been greatly surprised and pleased. The Sony guys are doing fantastically; the Handspring guys are doing very well; the Samsung phone has just been released, which I think is going to be a great product.
What we really hope to do, frankly, is to have the licensees, as they're already starting to do, add a lot of value to the platform and restructuring it as a business. We're on track to do that by the end of the year. The external manifestations will be the external reporting of our financials. And clearly we'll have to do a lot more in the way of promoting the virtues of
the platform and arguing why it's good for personal use as well as in the enterprise.
Palm established itself as the market leader in 1996 and was comfortable in that position until about a year and a half ago in the face of new competition, and the company's stock has fallen precipitously. How does splitting off the OS division help turn things around.
If we were the only company whose stock has fallen precipitously in the last six months, I'd be a little more defensive about it.
Q. But there also have been some missteps internally.
A. Absolutely. And we've admitted those. I think we've learned a lot from it, at least I hope we have. We've got some new folks in there to keep that kind of thing from ever happening again.
The whole idea behind separating the operating system and the platform group on the one hand and the hardware solutions group on the other is to allow each one of us to focus on what we do best. It's very hard to operate a combined company. I can't think of any company that does both - keeps the technology proprietary and manages to be successful over a long period of time.
So we made the right decision to license the technology. And I'm feeling better about it every day because every time one of the licensees brings out a new product, you see all kinds of new ideas that we can absorb back into the platform and make a better product for the next set of licenses.
Q. Microsoft has deep pockets and a lot of marketing muscle, and they've really been flexing it with Pocket PC. What is Palm's counter-offensive plan?
A. They are a huge company, and of course they have a huge set of things to spend on including a number of things that we don't have any interest in, like Xbox. They also have an enormous operating system on the laptop and PC side, which we don't have. We're focusing on the handheld area. It's all we do. We think we do it better than anyone else. We have the leading market share by a country mile at this point. And we think by focusing and creating great products that licensees can leverage to make stuff people want that we can be very successful. And so far we have. Pocket PC has not made much given the amount of money they spent. It's kind of astounding to me that they haven't made any more inroads than they have.
Q. At conferences like Comdex, the handheld industry people have been talking a lot about the convergence of wireless with PDA functionality. What is your vision for the PDA five years from now?
A. I think you said it. PDAs when they were introduced almost a decade ago really were only personal organizers - address books, calendars and so forth. And its proven, I think, that people value that kind of simple functionality - the value of the organizational benefits, the value of being able to use something without a lot of training and support. The next step it seems to me is to take that kind of usability and functionality and take it into an area where it's naturally usable. And that's the area of communications.
There are lots of things that wireless networks will allow us to do. I think the future of the whole handheld area, whether they're traditional handheld products like the Palm m series or Handspring Visor, or combined products like the Treo or the Samsung i300 or future things that the phone guys will do, they'll all have some kind of communications capabilities. It will vary whether they are focused principally on data, voice or some combination of the two. Everybody uses a telephone, everybody communicates. And my expectation is that that's what's going to blow the industry wide open.
Q. In building an operating system business that is going to be the most popular in that kind of environment, what types of industry partners are going to be important to Palm?
A. First and foremost: innovators. I'm really not interested in having 200 or 300 licensees that all do exactly the same thing as one another. I think one of the hallmarks of the Palm set of partners at this point has been that each one of them has brought something. Sony has brought fantastic multimedia capabilities. Handspring is another very good example. Handspring, Samsung and Tieserra, between them, are the entire smart phone market - three companies who chose the Palm OS to build the first generation of these converged devices. Those are the kind of people we want.
And frankly I think there is a lot of uncertainty about what is going to exactly the form factors that are going to be successful in the market. In think one of the great strength's of the Palm community is that we have people who think that way, try new things and bring out stuff quickly and find new categories. That's exactly the kind of partners we want.
Q. Some of the analysts I've heard from recently have pointed to the corporate enterprise as one of Palm's weak points. What are you doing on that front?
A. I think this may be a triumph of wishful thinking over data. If you actually look at the statistics at the moment, as recently as a couple of weeks ago, I can't see a case for anything other than Palm is the leader today and has been the leader for the last couple of years in this area. And I don't see any signs or evidence that it's not going to be the leader in the future.
The Jupiter guys came out in late September with a survey of a little fewer than 500 CIOs and other guys in corporations who buy this stuff. Eighty four percent said they intended to buy Palm based products and support that in their organizations. That's almost twice as many as said they would buy and support Pocket PC. In fact, there were about 45 percent who said they were going to do Palm exclusively. Two percent said they would do Pocket PC exclusively.
If you look at the numbers of products that are out there, the applications that are out there, the intention to buy, and the percentage of people actually using these products in the enterprise, we're not only No. 1, we're No. 1 by and enormous margin. So frankly, I think the honest assessment and as objective I can be is that we really are being out-marketed. And obviously we have to fix that.
Q. Pocket PC, I think even you'd admit, has emerged as a very strong competitor, and even Symbian to some extent is emerging as a competitor, as we saw Monday during Jorma Ollila's keynote [speech]. How do you see the competitive landscape in handheld operating systems shaping up, and what is Palm doing to remain the leader?
A. My view of it is that Microsoft is really the leading competitor. For one thing, they're an operating system company. They've been at it for about 25 years and have demonstrated that they can do decent products. They're generally not the best in the market. But they cover whatever deficiencies they have with great marketing. In fact I think they've always done a better job at that than anyone else in the industry, probably better than the technology.
Symbian had great promise. It was always a consortium. All the handset guys got together. But it's really just distilled down to just Nokia. The rest of them are really not clamoring to use it.
So frankly, I think it's between Microsoft and Palm. And one of the things that's really clear in the handset industry is that having a device that requires 32 or 64 megabytes just to run the operating system is not going to be interesting in the market. It's one of these areas where there's enormous elasticity. Most of these devices are $200 or less. Some of them are subsidized. But Microsoft's technology is so heavyweight and so overfeatured in most cases, I think the manufacturers are going to have a hell of a time making portable products based on it.
Another thing is that Microsoft has a bit of a dilemma. To be successful in the phone business, you not only have to work with the handset makers, you have to work with the carriers. And the wireless industry is investing an enormous amount of money on [high speed] networks, and they're not real enthusiastic about other people reaching their hand into the till as they grow revenues from those new networks. One of Microsoft's strategic dilemmas is that they have demonstrated that they are going to be really aggressive in the services business. The carriers look at that as competition. We don't have pretensions that we're going to go in and take a lot of the revenue from the carriers. We want to work with the carriers.
Q. You said that Microsoft's enhanced features would be a drawback for them. Some might argue that those features, such as MP3 audio and streaming video, which are built into the operating system, have been what's helped them gain market share.
A. I've been in the technology business for a long time, and when I first came into the business, pushing the technology was what a lot of the engineers tended to do. I had someone talk to me about the streaming media capabilities of Pocket PC, and the argument was that people were going to be doing sales meetings with them. People don't even do that with laptops. I'm going to take one of these things into a meeting with a CEO and say [holding up device], "Look, Bob. Take a good look at this?" That's nuts. It's wishful thinking.
Q. Palm's emphasis has always been on the simplicity of the operating system. At the same time there are more advanced features appearing in competing operating systems. What kinds of changes can we expect to see in the Palm OS in the near future?
A. There are a couple of key areas. First of all let me say I agree with you. When I first arrived a couple of months ago, one of the things that was the highest priority for me was to kick both the apparent innovation and the actual innovation into much higher gear. We've allowed ourselves to be given sort of a bum rap on the technology - which is actually better than some people have been writing about - because we have focused on simplicity. But it's also clear that we have to keep innovating and we have to keep doing much more.
One of the areas is security. I think these devices have to be much more secure than PCs.
Obviously we need more speed. A lot of the communications stuff require it. We announced that we're doing a port to the ARM processors, which of course is the family of choice for most communications device makers, and we're on track to do that. That will give us a whole new platform to do multimedia and other things that are hard to do. Although I walked around our booth earlier and was astounded at what some people have been able to do so far.
The third area is much better real time performance. We're a much more stable platform than Pocket PC. Windows XP apparently has gotten to a stage of robustness that appears to be stable, in terms of not crashing all the time. But unfortunately Pocket PC is sort of in the state of the art of five years ago, and as far as I can tell, people who buy Pocket PC devices experience a lot of crashes.
Q. What are the company's biggest challenges moving forward?
A. They're twofold. The first is to keep the heat on innovation, and useful innovation, not just the gratuitous "we got more pixels," "we got more colors," "we got streaming video," but stuff that people really want to use.
And then the other piece is to make the case to people who are buying in the enterprise formally. The people that work in companies clearly understand which thing is better. We need to make the case to those people whose livelihood is on delivering information to those employees. 
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