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To the degree that Palm pursues smartphones instead of handhelds, it goes from being a big fish in a small pond to a small fish in an ocean. Palm currently has 3.1 percent of the smartphone market, compared with 36.5 percent of the handheld market, according to IDC.

Yet the decision is sensible, since it is clear that most users want combined PDA and phone functions in a single device. According to Gartner, the market for non-phone handhelds will grow to 15 million units this year, while smartphones will reach 40 million units, indicating that Palm’s greatest opportunity for growth could be with its Treo smartphones.

Colligan says Palm’s management has made it clear that smartphones are central to the company’s growth, a philosophy that required careful explanation to those employees focused on developing handhelds. “You have to be careful about [handhelds] not being perceived as the old thing, or something not as interesting,” Colligan says.

In the midst of Palm’s transition to smartphones, the company decided to stop developing operating system software. In October 2003, it spun off its OS division as PalmSource, which now controls the Palm OS development.

Wirt says the company decided to break off PalmSource because it wanted to avoid the conflicts of licensing software to competitors. “Some people in the company are trying to kill the competition, while others are trying to sell to them,” says Wirt, who saw the same problems when he worked at Apple Computer, which briefly licensed its software to clone computer manufacturers.

Palm also wanted the freedom to use software from other companies. “We said then [when selling off PalmSource] and still believe, if there is a segment of the market that could be served better by different a OS, such as Windows, Symbian, or Linux,” the company would do what was best for its customers, Wirt says.

After the split, Palm continued to design smartphone and handheld devices that run the Palm OS. However, after PalmSource released version 6.1 of the OS (also known as Cobalt) in September 2004, Palm chose not to develop products based on the software.

Palm’s vice president of marketing, Page Murray, says the company did not develop for Cobalt “because we were making substantial enhancements to the existing OS.” The company continued to release handhelds and smartphones that used the prior version of the Palm OS.

Many software and hardware companies are now waiting for PalmSource to complete a new version of the OS that replaces the kernel (the underlying architecture for communicating with the hardware) with a Linux core, according to Douglas Edwards, vice president and cofounder of the mobile software development company Handmark.

Edwards says his company did not develop applications for Palm OS 6.1 because Palm “gave no sign that it would support the platform.” For now, Handmark develops applications for Microsoft’s Windows Mobile operating system as well as the older Palm software; but he remains optimistic about the Palm OS in development. A Palm OS based on Linux “could be robust platform” and a less-expensive alternative to Windows-based handhelds, says Edwards.

In part two of this article we’ll explore Palm’s partnership with Microsoft. Will the company’s embrace of Windows lead to new opportunities – or greater competition? Come back tomorrow and find out.

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