Palm to Create Subsidiary for OS Business

i voted not to splt in 1/2, but i am VERY happy wth this. The problem wth flat out spltting is that the OS side would probably go under, resulting in a crumbling of the entre palm economy. until it is possible to do a full split, i didn't wanna see them die bacause i love my palm os pda. A subsidary, however, i didnt object to since there really isnt much of a risk associated with it.

It's a delicate financial operation that requires a room full of lawyers, three accountants, two rubber bands and a koala bear. Cook in a 350 degree oven for seven weeks and then garnish with nuts, bolts, and washers then serve.

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News Editor
Palm Infocenter

what do you do with the poor koala bear?

Eat when tender.

you feed the bear to the lawers, when the begals and latte' run out

-Raishe
"Monster Pig kills Jesus
More at 11"

There are a couple of reasons to do this including:

1. as you stated, as a pre-cursor to spinning off completely

2. organizationally the company will operate very differently (e.g. a President for the subsidiary will make most decisions, needing approval for only the most important ones

3. financially, the two companies would have stand-alone financials plus the parent would have a consolidated financial (that would be the only publicly released financials). This way they can truely judge their financial success.

Palm is tiny company, only about 900 people. It doesn't make sense in term of corporate cost to set up another "subsidiary" to increase efficiency when the concept of "palm product" is OS+hardware and the old arrangement works pretty good.

so something is definitely up. And knowing Palm, usually they are pretty predictable. Most of the exect are unimaginative B-school type. Somebody, quick open a management textbook....

There was some idle talk about sony buying palm. The original guy (what's his name? hawkins?) had a good idea, but in order to see the product produced he had to sell his company (to us robotics). Then 3com buys us robotics. Meanwhile hawkins leaves to form handspring, and 3com spins off palm.

Now say palm spins off the OS, it runs into trouble, then gets snatched up by sony. Where does that leave palm hardware? They loose control of the direction of the OS, their products are increasingly less innovative than the clones. Say palm hardware goes out of business? Then you'd have a 'palm-economy' without palms, just like you have a 'PC-eoconomy' without original IBM-PC's. Microsoft/Intel basically rules the PC standard.

What would make sense is for palm to sell the OS subsidiary to handspring so the original guy (hawkins?) could continue his vision.

Sony is not going to buy Palm. If anybody buys Palm it will be IBM. IBM already has a good working relationship with Palm. Palm manufactures the IBM WorkPad line for them, and IBM hates Microsoft's guts due to past business relationships with them, i.e. OS/2.

IBM has virtually unlimited funds for Research & Development, has strong ties to the corporate community, and would instantly give credibility for the Palm OS platform for business use for those few companies that still have not decided on a PDA Platform.

That is a good point. IBM has an excellent R&D team, and they already have a great relationship. This should be interesting.

why would IBM buy PALM?

they can just cobble together an ARM PDA and install embedded Linux, and be done with it. It's cheaper and more profitable that way, not to mention it's good karma.

Because PalmOS already has a huge following, which you would automatically pickup. As opposed to setting up a competing system in which you have to convince both WinCE users and PalmOS users to switch. That and they'd have to kill off their own Workpad series.

does huge following prevent another gadget to suddenly sell more in term of dolar value? apparantly not. And Linux PDA hardware is backed by Sharp. Yes that would be from a company that has sell more PDA than Palm Inc. in Japan. What's more IBM already has a huge Linux research group, and all sources are open. Why bother buying a cpmpany with poison pill built into the stock when for chump change IBM can make hardware and integrate it immediately to their system? At least for the corporate market. Nobody is chalanging Palm's Inc reign in sub $90 bucks PDA. If you think Win CE is nasty for Palm, wait until Sharp with their proven hardware to come in.

i knew a linux geek would have their $.02. hasn't he read the posts about running commands in graf? i don't like to start flames, but that idea, it must have been the penguin talking or a Linus mole. i have mad respect for the Linux community, but sometimes they take their religion too far. i don't see any logic in killing off the 100,000+ developers in the name of some bird. they should focus their attack at the moment on the PC os market instead of making bird like comments in the pda world. big up to you guys, but relax here.

-Raishe
"Monster Pig kills Jesus
More at 11"

Companies wouldn't necessarily drop the Palm OS if there was a raise in price per unit of the OS, they'd simply pass the extra cost to the consumer. That way, profit from each device would remain the same for them. Poor business practice from the consumer standpoint, but it would have to be done.

Eric Garrido

Making money is not just about selling a unit for more then the cost of making a unit.

- You have to manage inventory (or it will lead to big writeoffs),
- collections (you can sell to alot of customers (remember Palm doesn't sell directly except from their website which I'm sure is a small part of their total sales)but you have to collect from them also. With alot of eCommerce sites going under there could be alot of losses from not being able to collect some or all of their receivables.
- There are alot of fixed costs that a company needs to recover to be profitable. For example building costs. Even if you sell a Palm for $400 with a manufacturering cost of $200 you still might not make money because the unit sales might not make enough "gross profit" (selling price - mfg cost) to pay for these building and other fixed costs.
- lawsuits (takes management time and legal costs)
- etc. etc.

for years? but none of them has even been around for more than 3-4 yrs. And why would Palm Inc appease licensee with making good politic right now? at the very time when politically it is in their advantage to kill everybody and come out ahead.

If Palm wanted to drive Handspring and HandEra out of business, they could do it in a heartbeat; simply withdraw their access to the OS. The fact that Palm licenses the OS at all should be an indication that Palm wants its competitors to succeed.

You can read my full opinion about Palm's relationship with its licensees in this editorial I wrote a few months ago:
www.palminfocenter.com/view_story.asp?ID=1706

You also might also be interested in Michael Mace's thoughts on this:
www.palminfocenter.com/view_Story.asp?ID=1706&MODE=FLAT#8020
(I can confirm that this really is Michael Mace, not someone using his name.)

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News Editor
Palm Infocenter

Good point Ed.

I also don't see this as a sign of weakness. It is well known that Strategic partners don't want to compete with yet rely on the same company. This gives Palm an unfair advantage in their eyes.

This has been a complaint against M$ for years now (and Apple when they tried licensing their OS). If you don't believe me, ask the Feds who wanted to breakup M$ for this very reason.

Palm is just being more "fair" to it's strategic partners and allowing the OS subsidiary to "prove" itself by becoming profitable. The only way the OS company can do this is to service ALL their customers (e.g. Sony, HandEra, HandSpring, IBM, Palm) equally. For example, I would hope that all companies will have equal support of Palm Desktop and Palm OS AT THE SAME TIME.

Good move Palm.

not against Handspring they can't. Handspring has Palm by their ball. When Hawking/Dubinsky bailed out they have some sort of agreement regarding palm OS ownership.

Plus, if you remember the last rumor about Handspring jumping ship, than a month later they sign contract for "undisclosed" amount. (wonder, wonder) than we know Palm was trying to jerk HS but they couldn't pull it off. Afterall, their share of sale was eaten alive by Handspring at exponential rate at that time.

from all licensee, (HS/SNE/handEra) Palm can only jerk around HandEra.

Palm has nothing whatsoever to dictate the Palm technology direction except their happen chance of owning the original Palm OS, which than is connected with market share.

but really, everybody else has better hardware, and from HS/HandEra/Sony we know that they are reasonably competent to write important extension.

Palm isn't that far ahead in OS know-how curve to be able to say they have significant advantage on the next gen OS.

remember the 4.0 is a basket case, this isn't even worth arguing. What you see is what you get, in term of strategy. But OS 5.0 is different story. It is make or brake time for Palm-kind. 5.0 will determine if Palm will be a viable future PDA or become another curious computing hisotry footnote.

You said "If Palm wanted to drive Handspring and HandEra out of business, they could do it in a heartbeat; simply withdraw their access to the OS."

This is dead wrong. Palm is legally bound by their license agreements to supply the OS to Handspring, Sony, IBM (who just sells rebadged versions of Palm's PDAs), Symbol, HandEra, Acer and a number of other hardware manufacturers.

Sony's license was announced in November, 1999. In April, 2001, Handspring extended its license to use the Palm OS through April, 2009, while in May, Symbol extended its license of the Palm OS through April 2005. Acer signed up in June, 2001. Perhaps you could do a bit of research and let us know when the other agreements expire. It's probably safe to assume that the other licenses all last at least 4 or 5 years.

As you are aware, Palm licenses the OS for less than $10 per PDA sold - not enough to make the company any significant profits and this is why they are so dependent on hardware sales. Given the fact that they are locked into long term OS contracts, don't expect this arrangement to change any time soon.

Also remember that the two most significant additions to the OS were supplied by its licensees/competitors, namely 16 bit color (Handspring) and VFS (Sony). The third significant innovation - AutoCard (HandEra) - is not truly part of an OS, but Palm should have rushed to license this technology for their PDAs. Palm thought they could be clever and sit back and have their licensees do all the OS innovation for them and simply cherry pick whatever they want and then roll it into the new Palm OS. Too bad they didn't bother spending the money they saved on OS development on trying to improve their hardware!

Ironically, Palm itself receltly said,

"IF WE FAIL TO EFFECTIVELY RESPOND TO COMPETITION FROM PRODUCTS INTRODUCED BY LICENSEES OF OUR PALM PLATFORM OR IF OUR LICENSEES FAIL TO SELL PRODUCTS BASED ON THE PALM PLATFORM, OUR RESULTS OF OPERATIONS MAY SUFFER AS THE REVENUES WE RECEIVE FROM LICENSE FEES MAY NOT COMPENSATE FOR THE LOSS OF REVENUES FROM OUR DEVICE PRODUCTS.

The success of our business depends on both the sale of handheld device products and the licensing of our Palm platform. However, licensees of our Palm platform offer products that compete directly or indirectly with our handheld computing devices. For example, licensees such as Handspring and Sony use our Palm platform in products that can compete with our handheld devices. In addition, our Palm platform has been licensed by other manufacturers such as Nokia and Kyocera for use in devices such as mobile phones or other similar products that can compete indirectly with our handheld devices. If revenues from our handheld devices suffer because of competition from licensees of our Palm platform, our results of operations would suffer and our ability to implement our business model would be seriously challenged. In addition, our licensees may not be successful in selling products based on the Palm platform, which could harm our business and results of operations."

http://biz.yahoo.com/e/010411/palm.html

I haven't read Palm's licensing contract (and I'll bet you haven't either) but I'd also bet Palm has a clause that allows them to get out of it if they want. They'd probably have to pay the licensees some cash but they could get out.

Remember when Apple used to license its OS? Then one day they stopped. Just made an announcement and it was over. Palm could probably do that, too.

Don't forget, this is America. Companies are only bound by what can be proved in court. If Palm withdrew Handspring's contract, they could keep them tied up in court until Handspring was dead. Palm would eventually lose but it would be moot. Even a big $$$ payback can't bring a dead company back.

I'm not saying Palm will or should, but they COULD.

First of all, do you really think Sony and Handspring would be dumb enough to sign an agreement that doesn't guarantee them access to the OS that is needed for the PDAs they've invested millions on?

And do you really think Palm could win a legal battle with Sony? Don't be silly.

The companies that signed on to license Apple's OS were minor league manufacturers that had no clout with Apple. Palm, on the other hand, was in no position to bargain with Sony, etc.

and more importantly, can PALM afford such legal battle? is not like they have money to throw around these days.

If there is one company who knows how to handle sucker contract, it would be Sony, not PALM.

Handspring i think would just take the route of out innovate and make PALM irrelevant if push come to shove.

so really, it comes down to who got the brain, money and the guts. I would say Palm isn't the top on any of those departments.

A few more great quotes from Palm's SEC report writer, "Nostrademus".

PALM INC (PALM)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations

http://biz.yahoo.com/e/010411/palm.html

I'd suggest anyone interested in Palms read the whole article. I learned more about the real state of the "Palm economy" in 10 minutes reading the report than I have in the past 3 years I've owned Palms.

"Any litigation regarding patents or other intellectual property could be costly and time-consuming, and divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or indemnify our Palm platform licensees. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of our products."

"If the Secure Digital Association does not ratify the Secure Digital input/output ("SDIO") specifications in a timely manner or if the SDIO standards ratified by the Secure Digital Association are not favorable to third party expansion solution developers, the deployment of third party expansion solutions might be delayed or affected, which could negatively impact sales of our products that include Secure Digital expansion slots, such as the m500 and m505 devices."

"Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations domestically and internationally and have increased our shipments and headcount substantially. At February 25, 2000, we had a total of approximately 878 regular employees. At March 2, 2001, we had a total of approximately 1,524 regular employees. This growth has placed a significant strain on our management systems and resources."

If they only counted those employees who did any REAL work at Palm they'd have closer to 400 employees. The rest are parasites that are sucking the company dry. Palm is one of the best examples of a high tech company with a bloated payroll full of people who don't do a damn thing.

Compare this to what a tiny company like TRG (HandEra) has been able to produce with a workforce of something like 50 - 100 employees.

HS has 258 employees

Handspring has 258 employees - is that with or without the 40 who were dropped last week?

This is beyond tragic. This is comical.

Personally, if I am the power that be, I would fired everybody that doesn't have anything to do with writing program and designing the gadget itself. I would imagine that would be about less than 100 people hardcore techy, the rest are just lawyers, suits, loosers and interior decorators. (especially fired all the execs, they cost the most and produce the least. All they can do is giving speech and making marketing jingle and think up product packaging instead of a real cool gadgets)

they had almost 1500 people before and all they can come up was m505 and OS 4.0? Mann... So much for multibillion dollar IPO.

a perfect illustration that capitalism does not necessarily translate to efficient capital use.